Platform vs. Tuck-In: The Private Equity Playbook Explained

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All right, so most business owners spend years building something great and almost no time thinking about what comes next, how to value it, how to structure a sale, how to take chips off the table without maybe losing value of what they built.

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The people on the other side of those transactions, the private equity firms, the family office, the holdcos, these kind of like exit plans later on, they think about this stuff every day.

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And today I'm bringing on one of my friends, the co-host of the show, Jude David to talk about this on the show.

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Jude, welcome back to the Deal Podcast.

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Yeah, thanks Josh.

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Always happy to be here.

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Yeah.

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All right.

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So with that cool introduction, man, let's talk about the one side of the business, the Kin capital.

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What is Kin Capital Partners?

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In short, it's three dudes.

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But it sounds like a big fancy private equity firm or something like that.

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But it's myself, my business partner, Eric, and then my brother.

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My brother's my third partner, but also a silent partner in the deal.

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So doesn't get too involved in the day to day.

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We had the opportunity back in 2020 to buy our first company together and nobody wants to sell a company to three dudes.

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like three guys that show up and say, yeah, we could buy a company.

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And so, you start having that conversation and say, yeah, we've got deal experience, we've got some money and brokers will tell you, well, so does everybody else.

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They say they have deal experience, they say they can buy a company, whatever else.

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So you have to like put on a little bit of a presence.

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And for us, that was Kin Capital Partners.

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We're gonna be a fake it till you make it kind of uh small family office.

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But, you know, fortunately that deal worked out just like we said it would and we've done about a dozen of them since then, you know, growing in size and actually we've, you know, kind of become a true family office with a bit of a war chest and the ability to execute on some transactions.

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Yeah, so I mean this is this great story you guys were going out to buy buy some businesses your background you were M &A attorney for a long period of time if people want they could listen to some of the the story it's fantastic and you were kind of like Sick of like if you're not clocking in clocking out you're not making money So you decided to go the on the deal side of things, right?

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But you went out with a ton of experience as an &A attorney to actually buy some businesses And you've you found that a lot of brokers weren't even paying attention to you or or something like that kind of explain like what made you go?

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Okay, I think we actually need to stand up more of a structure a presence a position so that people will pay attention to this Yeah, so I've always had a real passion for deal making and because of my background practicing law, I got the kind of experience that most people will never get.

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I've like literally hundreds of M &A transactions, most of them in the mid market, billions of dollars of deal value and transaction value over time.

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And so really there's just no substitute for experience.

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That's something great that I got to witness and I got to see the good, the bad and the ugly.

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I got to see deals done really well, entrepreneurs that grew businesses the right way.

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I also saw deals that didn't go so well and entrepreneurs who did things the wrong way.

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And so I got to take what I wanted from that and apply the things I liked about what I'd seen.

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And also I got to avoid some of the pitfalls of other folks.

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And one of the really big pitfalls that I saw was poorly advised deals, uh brokers and advisors who built transactions based on what served those brokers and advisors.

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And sometimes that was a knowing thing.

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They get the biggest fee based on the way they're building the deal.

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A lot of times it was just a lack of knowledge, not having the deal experience, not understanding what's best for the client.

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uh I had an old law professor who used to say, the only tool in your tool belt's a hammer, everything looks like a nail.

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And I think that's what it is for a lot of advisors.

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It's like they only know one way to sell a business or they only have one uh trick up their sleeve and that's what they're gonna apply every single time.

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But this is a really nuanced business.

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mean, every business transaction is a little bit different.

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And also there's a thousand ways to skin a cat.

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Sometimes all cash is the right structure for a deal.

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Sometimes rollover equity is the right structure.

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There's also a thousand different ways to slice up earn out to give owners the opportunity to get a little bit extra in their deal and incentivize them the right way.

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Some companies, the owner really needs to stick around.

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Other companies, the owner can walk away the day of closing and every deal is a little bit different.

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And so if you have experience in a comfort level, about what you're doing, you can really evaluate all those things and build a deal that fits the owner and fits the business.

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And so I like to think that's what we bring to the table, a lot of deal experience where we can do that and really customize something that meets everybody's goals.

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Yeah.

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When you said you guys have done a dozen transactions for your own group, the three dudes starting this out, talk to us about how you start.

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Do you start broad where you'll explore everything?

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Does that happen over time?

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Do you stick with a mandate?

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How did you guys decide to go one specific direction?

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No particular focus that we had to have.

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It's just we had a couple of door and window businesses that were available to us that first year, and those looked really attractive.

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And our idea was we're going to have some iron and steel doors and windows, and we're also going to have high-end custom doors and windows.

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That was actually really challenging to piece those together.

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It seemed like a hand in glove fit to have that full product line and full offering.

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uh Very rarely do we actually find one customer for one business that wants to cross over to the other one.

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And so a little more challenging than you'd think.

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We've added lots of other pieces to the door and window empire though over time because the best thing you can do...

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uh when you're an acquisition entrepreneur, a buy and build kind of entrepreneur is find, uh it's a cliche word, but synergies, find different businesses that work better together than working separately.

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And that can be all kinds of things.

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If it's uh an oil field related business, having uh one company with a lot of MSAs and a lot of customer relationships, and then you add on a different service-related business, you might be able to partner those two together and get them to go.

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So it doesn't just have to be a business that's uh very complimentary.

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People naturally see like if we manufacture trailers, a complimentary business would be another one that manufactures trailers.

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But maybe that's not the case.

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Maybe if you manufacture trailers, trailer dealers might be a good complimentary business for you because you already manufacture them in your current business, you need a way to sell them out in the marketplace.

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uh Or maybe you go upstream a little bit and you have component manufacturing.

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whoever is supplying parts to your business, that's what you might want to acquire.

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And so the simplest version of bundling businesses together is finding businesses that are almost the same.

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uh The more nuanced version of it is finding ones that can complement each other well.

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So Do you see this happen where someone goes to buy a bunch of businesses and they wind up buying businesses that are not even connected no synergies and you know, they're they're spread thin or you know something else happens like have you seen those kind of scenarios like what could go wrong if you don't find things that have that synergy or what are you missing?

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Yeah, we've done it ourselves.

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You know, by accident, you think that things are to be really complimentary to each other and then they end up not being.

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You know, we've acquired a business that we thought was the perfect complement to what we were doing.

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uh And it just felt like, boy, it's what we're building, except they're 10 years down the line and they've already gotten there.

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And that felt...

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perfect to us at the time.

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Like we're going to buy this and we're going to integrate it into what we're doing and it's going to be, know, rising tide lifts all boats.

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What we didn't account for was that they know that they're that much better than we are and 10 years further down the line and they don't want to step backwards and help us get there.

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They've already made it.

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And, you know, there's a thousand other ways that, you you can have a misfit or a mismatch, but We just took a step back in that scenario and said, okay, well, we can't change the past.

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We can't change what we did wrong or what we misperceived in that moment.

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We just have to reevaluate where we are today and figure out how we can grow from this.

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you know, is there a way for these businesses to work together and gain anything from each other?

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You know, even if it's not the same thing we thought before.

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And if that's not the case, then how do we run these separately?

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so that they can both play to their strengths.

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And it actually looked a lot more like the latter.

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How do we keep these separate and have them play to their strengths?

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But there was a beauty to that too.

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And it's just a matter of not being so married to an outcome.

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Yeah.

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So when you're evaluating these companies, were, you you started in the window space, doors and windows.

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And did how much of like, uh did you put the weight on geography as you were looking at companies or were you kind of agnostic to where they are as long as they're good?

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Well, I've made mistakes there as well.

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So, you know, I had this idea that we were going to build out the different sections of the map.

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And so we built out doors and windows on the East Coast and the Southeast and South Central and Southwest.

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You know, with the idea that we're to be able to flex across all of these companies and do projects together whenever we fill out different areas of the map.

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And...

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It's really hard to move product from one area to the next.

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It's very expensive.

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Products are really heavy.

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It's very difficult to take, you know, complementary businesses that are in different geographies and get them to collaborate on things.

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And so, you know, it was actually a lot harder than we thought it would be.

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We figured it out and we eventually got there, but it wasn't just the super simple, you know, fill in the dots on the map.

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and see if we can get all these things to work together.

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It actually took a lot of effort and time trying to get these businesses to flex and work together.

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Over time, you can build a culture with it though, and you can really try to understand it better.

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But I think now that we've matured somewhat in the door and window platform, and I'm on to our next couple of platforms at this point, I'm focusing on a more condensed geography.

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So I still like regional plays.

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I don't particularly like businesses that are focused on one city or one tight geography.

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I like a region.

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But a region might be two or three states that are contiguous with each other rather than an entire half of the country trying to get businesses to work together.

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It's a big country.

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There's a lot of space out there.

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Yeah, yeah.

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When it comes to, you you mentioned platforms.

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What is a platform?

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We hear that all the time in, you know, private equity.

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They're building a platform business or whatever.

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What's that mean?

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Well, it's really just a section of your business.

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uh Private equity talks about it in terms of usually the first business that they're going to acquire in a particular sector.

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And that business will have all of the add-on businesses tucked into it.

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And so when you're trying to select a platform, usually it's going to have some size to it.

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It'll have some sophistication to it.

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Like, uh you know, it might be...

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$20 or $30 million in revenue at the time you acquire it with some real profit.

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So there'll be cashflow in the business.

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They'll probably have some sophistication like processes and procedures, hopefully a management team that knows how to manage that business well and can scale.

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And then maybe some technology stack that's built out well enough to be able to scale as well, like an ERP system or other processes on the tech side that'll be able to scale.

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Why is that important?

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Well, if you have a business that's already somewhat in the mid-market and then you can take smaller businesses and tuck those in to that mid-market business, it makes the mid-market business bigger.

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And so you might have to pay five or six times earnings for that platform, but those tuck-ins might be three or four times earnings.

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And you just keep growing that platform every time you do one of those tuck-on acquisitions.

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And then hopefully you grow the whole thing to a size where your exit multiple might be seven, eight, nine times earnings.

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And so you made money on the platform, you made even more money on the add-ons.

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Yeah, that's interesting.

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So as you're building the platform, you can, you know, take things that have a lower multiple and kind of like tuck them in to what you're doing.

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It makes kind of them all more valuable when it comes to these kind of strategies.

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How do you know what to, you know, piece together building this Voltron, you know, transformer?

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Like, how do know what to tuck in?

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How do you know what to buy?

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How do you how can you think through those strategies?

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You know, experience matters a lot.

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It really, really does.

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You know, I looked at, you know, hundreds of businesses that were available for sale today.

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And, you know, multiple times a month I'm doing this.

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I have, you know, business brokers and &A advisors and investment bankers who will send me all these different transactions.

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And I'll plan out two or three days a month when I sit down and I just...

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plow through them.

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And so today was one of those days with hundreds of businesses uh that I took a look at.

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And uh I've got certain things that I'm focused on whenever I'm doing that.

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There are certain types of businesses I like.

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I love manufacturing, uh in part because I can understand it.

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There's something very physical and tangible that I know I'm buying, whereas a service-based business, less so.

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service-based businesses is much more about the relationships and uh the know-how of the people there.

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uh When I think about AI and what it's going to do to the business world, service businesses scare me a little bit.

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uh If I was going to buy a CPA firm or a tax preparation business, there's a good chance that a lot of that service gets replaced in the next five years with AI.

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And so if I start rolling up CPA firms over the next five to 10 years and then trying to layer on tech to those businesses to get ahead of the technological revolution that AI is bringing, the chances are there's going to be a new startup that's tech enabled from day one who's going to eat my lunch.

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And so I don't really like those.

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I'd much prefer something that's a niche product.

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hopefully on the luxury side that's being manufactured here in the US.

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uh And something where we can see some clear value add.

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And add-ons get a whole lot simpler too whenever you're doing that because now I want to add on components to that manufacturing or add on things that can assist that manufacturing.

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And so if I'm manufacturing generators uh and I'm selling those generators, I might look for other generator manufacturers.

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I might look for manufacturing companies that make the parts of those generators.

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Or I might look for businesses that can sell those generators.

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Or even, that's the kind of service business I might like is one who's installing those generators and servicing them for the clients.

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so uh very physical businesses, I think, are a lot more immune to the AI world than a lot of the thought-based businesses.

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It's hard to give you an exact answer of what I'm looking for, but it's just a matter of I kind of know it when I see it.

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For sure.

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Yeah.

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How do you know a good deal?

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You know one when you see one, but all right.

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So you're sifting through hundreds of emails.

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Like are they, you're in their data rooms or these just basic emails.

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Like how do you sort through and sift through?

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Cause I think that's going to be a great value add for someone out there to kind of learn how to sift through deals faster.

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How do you do it?

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Yeah, if it's less than a million dollars of EBITDA, I'm just not interested.

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uh mean, unless it's a uh very clear tuck in to something that we already have, maybe I'd be interested in that circumstance.

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otherwise, probably not interested.

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You know, even on like the millwork side, we're acquiring millwork platforms right now.

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uh And the add-ons that we're doing there, I probably wouldn't be interested in anything less than a million of EBITDA.

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Just because the level of sophistication I need to see from a millwork business is going to require that they've gotten to that point where they've figured out the growth to be able to get to that level of profitability.

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And when I say that, what I mean, well, if I buy a millwork business that is all manual and it's a bunch of laborers who have skills and they know how to make products out of wood, they're probably not very cost competitive out in the world.

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uh And so I need ones that have built out the sophistication and the know-how to be able to create processes and you know who can use machines and you know advanced level product manufacturing Because that's the kind of stuff that we can add on to what we're doing and really create some value with it and so you know that would be an example of what I'm looking for in millwork if I'm looking for a new platform something that's you know that we're not in at all anymore.

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I'm probably looking at a little bit bigger, know, three to six million dollars of EBITDA to try to find a platform that fits in that category.

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uh Bigger isn't always better though.

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If I find something that's 15 million of EBITDA, I probably shy away from it because uh it's already a little bit too big for the mid market to be able to be a platform and let me scale it the way I want to scale it.

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And so, you know, that's on the earning side.

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The intangibles though, what am I looking for?

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I'm going to take a very quick glance to see how competitive is this?

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Is this something that is a very heavy industry where there's a lot of competition?

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Right now, if you look at HVAC companies, plumbing companies, mechanical contractors, roofing businesses, those sorts of things, based on the description I just gave you, those would fit.

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the kind of business that I've been talking about, very uh labor intensive kind of business, but they're so competitive.

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Like every private equity out there has a roofing platform or an HVAC platform or one of those.

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And so if I go buy a mid-market HVAC company, I'm probably gonna pay eight times earnings for it.

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Well, even if I go grow it substantially, I might be able to sell it for nine times earnings.

00:20:30.548 --> 00:20:32.910
Well, that's not very attractive to me.

00:20:33.117 --> 00:20:41.103
I want to find businesses that are in a little bit less competitive market where I can start a little bit smaller and grow it into something bigger.

00:20:42.164 --> 00:20:54.653
But kind of the biggest and most important thing I'm looking for once I've figured out scalability and the ability to grow a business is the management team and the people that are there.

00:20:55.795 --> 00:21:00.958
That's the hardest thing to grow in a business is getting the right team and the right culture.

00:21:00.970 --> 00:21:02.191
the right know-how.

00:21:02.191 --> 00:21:06.013
And if you find a business that already has it, it's like the cheat code.

00:21:06.013 --> 00:21:08.516
You've just jumped ahead 20 years.

00:21:08.516 --> 00:21:11.999
They've already learned all the hard lessons and gotten to that finish line.

00:21:12.419 --> 00:21:16.122
so being able to jump ahead makes all the difference in the world.

00:21:16.584 --> 00:21:24.368
So you're looking at at least a million in EBITDA, but if they get too big, you might miss out because they might be too big already.

00:21:24.368 --> 00:21:28.592
And you like this kind of like the lower middle market kind of play.

00:21:28.592 --> 00:21:30.633
Why do you choose that?

00:21:30.633 --> 00:21:32.604
Why not startups?

00:21:32.604 --> 00:21:34.365
Why not less than a million in EBITDA?

00:21:34.365 --> 00:21:41.500
Why not take something that had the potential for 100 extra turn or 50 times earnings or whatever?

00:21:41.500 --> 00:21:42.839
Why'd you choose that?

00:21:44.180 --> 00:21:48.151
Yeah, like three quarters of new businesses are going to fail.

00:21:48.651 --> 00:21:54.133
And so if you think about it that way, gosh, why would I want to do a startup?

00:21:54.813 --> 00:21:57.794
I've got a very good chance of failure if I'm doing a startup.

00:21:57.794 --> 00:22:03.855
uh Most businesses that have hit a million dollars of EBITDA will grow from there.

00:22:04.115 --> 00:22:14.387
And so just in terms of stats, I'm in a much better crop whenever I get to the level of business that's most likely to survive.

00:22:14.817 --> 00:22:18.279
And so that's one thing for me, the risk.

00:22:18.980 --> 00:22:26.604
But also it is really slow and time intensive to get a business from zero to one.

00:22:27.144 --> 00:22:35.409
Getting it from the startup phase and growing it to a level that it can be substantially profitable.

00:22:35.409 --> 00:22:37.890
And there's a lot of hard parts to that.

00:22:37.951 --> 00:22:51.863
If you're a startup business and you don't have enough capital to be able to make the investments you need to be able to grow, You have to keep scraping and scraping and scraping to figure out how to get the next client, the next customer to be able to get enough money to be able to get to the next level.

00:22:51.863 --> 00:22:58.446
uh That's what buying a mid-market business uh gives you that a startup won't.

00:22:58.446 --> 00:23:09.034
If I jump in and I've got millions of dollars of profit being generated by a business, yeah, I might have to pay half a million of that to a bank for the acquisition debt.

00:23:09.034 --> 00:23:11.276
But the rest of it is cash flow in the business.

00:23:11.276 --> 00:23:15.076
I can take that and invest in the future of that business.

00:23:15.678 --> 00:23:17.920
Now, this is where a lot of people go wrong.

00:23:17.920 --> 00:23:30.047
A lot of people see that cash flow and they say, ooh, that's a new boat or that's a new RV or that's a big fancy new house or whatever, new country club dues or whatever the case may be.

00:23:30.307 --> 00:23:32.249
That's where a lot of people go wrong.

00:23:32.249 --> 00:23:34.609
You have to go in with the mindset of...

00:23:34.705 --> 00:23:39.215
every dollar of that cash flow is being plowed back into that business so that we can grow it.

00:23:39.215 --> 00:23:46.160
And if you do that, eventually you're going to get to the point of having some spoils where you can go buy whatever you want with it.

00:23:47.356 --> 00:23:50.419
So then how do know as you're building this, right?

00:23:50.419 --> 00:23:52.990
We talk about, you know, complexity.

00:23:52.990 --> 00:23:59.505
You start buying these things, the geography grows, you you've got a bunch of kids yourself.

00:23:59.505 --> 00:24:06.239
how do you know when it gets too complex and how do you manage the team, like in terms of your own private equity groups or family office?

00:24:06.239 --> 00:24:13.493
Like, how do you scale within that so you're not one day, you know, bringing out a saw and cutting up a piece of wood?

00:24:13.493 --> 00:24:16.385
Like, how do you manage that complexity?

00:24:17.501 --> 00:24:22.794
You are never going to see me getting a saw and cutting a piece of wood in one of our businesses.

00:24:22.794 --> 00:24:26.684
So very little chance that you're going to see that.

00:24:26.684 --> 00:24:33.487
uh No, we've only exited one of our companies so far.

00:24:33.487 --> 00:24:45.289
uh Most of our businesses, we're starting with the size of business where we're past that initial startup phase and we have a very clear path of where we want to take it.

00:24:45.311 --> 00:24:48.272
But what's interesting to me is the ability to grow.

00:24:48.272 --> 00:24:52.625
And I have to be careful saying that.

00:24:52.625 --> 00:25:00.167
I've had some of our management team and some of our employees, when I use the word growth, they think dollars.

00:25:00.188 --> 00:25:07.290
They think that I'm coming in and saying, well, you started at X number of dollars and I want you to get to 4X.

00:25:07.471 --> 00:25:13.432
yes, mean, dollars are the scoreboard for how you're doing in business, but they're not the goal.

00:25:13.432 --> 00:25:15.453
The goal is growth.

00:25:15.465 --> 00:25:17.747
which has very little to do with dollars.

00:25:17.747 --> 00:25:20.957
It has everything to do with us as a company.

00:25:20.957 --> 00:25:22.048
Where do we want to go?

00:25:22.048 --> 00:25:23.928
What do we want to achieve?

00:25:23.988 --> 00:25:31.589
And so for me, growth is all about our customers, what it is that they want, how we're able to achieve it for them.

00:25:31.609 --> 00:25:45.513
And so we're trying to build a business that hears those concerns of our customers, hears those needs of our customers, and we jump out and answer those needs and give our customers what they need better than anybody else does.

00:25:45.640 --> 00:25:49.550
And so, ideally we're doing it in a different way than somebody else.

00:25:49.852 --> 00:25:54.012
If we're not doing it in a different way, hopefully we're just doing it better than somebody else.

00:25:54.094 --> 00:25:56.854
And so, that's really our goal.

00:25:57.454 --> 00:26:12.260
The reason we sold our business in Las Vegas last year, we had essentially, through an acquisition and through some organic growth, had gotten that to where we built half of the new doors in the Las Vegas market.

00:26:12.280 --> 00:26:14.801
Well, where do you go from there?

00:26:14.865 --> 00:26:17.487
What is your growth path from that point?

00:26:17.847 --> 00:26:26.272
And that was a real challenge for us because it would have involved new geographies, but that business wasn't really set up to go take on new geographies.

00:26:26.772 --> 00:26:36.878
It would be much better in the hands of a much larger business that already had those geographies built out and they were adding this on.

00:26:37.000 --> 00:26:39.211
And so that was a better fit for that business.

00:26:39.211 --> 00:26:45.084
But for us, it's all about through our various platforms, can we paint a picture for growth?

00:26:45.084 --> 00:26:51.626
Can we figure out a way to keep this business with a good, strong, clear vision?

00:26:52.847 --> 00:26:56.400
I like to use little diagrams and images and whatever else.

00:26:56.400 --> 00:27:00.633
Well, in a business, think of it as a pyramid.

00:27:00.633 --> 00:27:04.855
Your base layer is trust and transparency in your leadership.

00:27:04.855 --> 00:27:09.416
If you have good, strong leaders that people can believe in, that's your foundation layer.

00:27:09.416 --> 00:27:23.702
uh A layer above that, you have to have a really strong vision where you can lay it out for the people in that business, the employees, the customers, whoever it is, show them this is where we're going, this is what we're trying to accomplish.

00:27:23.702 --> 00:27:28.224
And then above that, the top layer of the pyramid is effective execution.

00:27:28.724 --> 00:27:43.267
And so as long as we can keep being truthful and trustworthy and transparent and keep having a vision of where we're going and keep executing on that vision, we're gonna keep being excited about the business.

00:27:43.846 --> 00:27:53.912
It's when we get to the point that perhaps we don't have a vision any longer because we've set out to accomplish something, we accomplished it, and really there's not a next step.

00:27:54.112 --> 00:27:59.153
That's the point that maybe it's time for a larger firm to come in and do an acquisition.

00:27:59.354 --> 00:28:01.605
Okay, so let's talk about that.

00:28:01.605 --> 00:28:05.548
There's a bunch of private equity groups or family offices that have built a portfolio.

00:28:05.548 --> 00:28:08.069
They have a portfolio of businesses, right?

00:28:08.069 --> 00:28:09.750
Some of them may be going stale.

00:28:09.750 --> 00:28:11.031
Some of them may be growing.

00:28:11.031 --> 00:28:18.457
Some of the complexity might be getting better, you know, out of hand or maybe succession is coming and the kids don't want to take it over.

00:28:18.457 --> 00:28:35.009
For whatever case, for groups that have portfolios of business, talk to us about maybe some divestiture strategies or liquidity strategies because I'm seeing that a lot in the news feeds about liquidity for private equity groups.

00:28:35.009 --> 00:28:36.971
Walk me through your thoughts on that.

00:28:38.625 --> 00:28:44.446
It's so interesting because private equity has changed so much since I've been doing this.

00:28:45.268 --> 00:28:47.397
And that's not that long of a time.

00:28:47.397 --> 00:28:49.449
You're talking about 20 years.

00:28:49.689 --> 00:28:55.590
But in 20 years, we've seen a total transformation of what private equity means.

00:28:55.671 --> 00:28:59.872
It used to be that you had a bunch of firms.

00:28:59.872 --> 00:29:07.784
They tended to be very large firms that had a lot of really sophisticated guys with a lot of deal history.

00:29:07.882 --> 00:29:44.817
and those guys were sitting on a big fund and it was pension funds were investing and insurance companies were investing and sometimes banks and other uh large capital groups were investing in these private equity groups and you had very flexible fund parameters about how those funds would get invested and what the returns looked like on those funds and so They had a little bit more flexibility back then in the way they invested, but also a lot more honesty in their deal making.

00:29:44.817 --> 00:29:49.269
They would sign a letter of intent and they meant to follow through with it.

00:29:49.569 --> 00:30:00.903
The world has changed so much because it's independent sponsors now who make up most of the private equity world, which uh it means it's guys that might have deal history, they might not.

00:30:00.903 --> 00:30:04.673
Some of them are very experienced and have a lot of deal history.

00:30:04.673 --> 00:30:05.773
Other ones...

00:30:05.917 --> 00:30:08.979
it's two guys that got together and they've never bought a company before.

00:30:08.979 --> 00:30:19.963
ah And it's really hard because they all say the same words, they say how experienced they are and they say all the great relationships they have and the people they've worked with and yada yada.

00:30:19.963 --> 00:30:26.606
So you really have to dig below the surface, maybe even check some references to figure out if you're dealing with a good one or a bad one.

00:30:27.548 --> 00:30:32.509
But the most important part of that equation is that they don't have money.

00:30:32.798 --> 00:30:40.964
So, you very often the sponsor isn't putting any money into the deal or if they are, it's a very small amount relative to the total deal.

00:30:40.964 --> 00:30:45.719
They're going out into the world and shopping after they sign an LOI with you.

00:30:45.719 --> 00:30:48.570
They're shopping for somebody to give them the money.

00:30:48.570 --> 00:30:59.339
And so it might be the same pension funds and insurance companies and banks and whatever else who are investing, but they aren't investing on the early stage and creating a fund.

00:30:59.339 --> 00:31:02.682
They're investing on the backside after they've already seen an LOI.

00:31:02.846 --> 00:31:06.999
The only problem is they look at that LOI and they might look at it as a starting offer.

00:31:06.999 --> 00:31:14.262
They might say, okay, you agreed to pay $15 million for that business, but I think it's worth 12.

00:31:14.262 --> 00:31:20.596
And so I'm willing to give you the money if you go back to the seller and renegotiate with them and get the deal at 12.

00:31:20.605 --> 00:31:24.166
And so you can see the complications that get created there.

00:31:24.166 --> 00:31:27.749
And so it's a really complicated world now.

00:31:27.749 --> 00:31:33.643
um the way things get invested and the way sellers have to navigate it.

00:31:33.784 --> 00:31:37.464
And so that's something I really like about the way we do it.

00:31:38.105 --> 00:31:43.907
We are investing our own capital, which honestly creates some challenges for us.

00:31:43.907 --> 00:31:49.619
We've had challenges convincing banks and lenders to work with us because they don't understand.

00:31:49.619 --> 00:31:52.631
Like, why don't you have investors behind you?

00:31:52.711 --> 00:31:58.053
And it's because I want to invest my own capital and I really believe in what we're doing.

00:31:59.837 --> 00:32:07.137
You know, they put us in a category of unfunded, which, you know, sounds like a really bad word because it's like, well, what do you mean unfunded?

00:32:07.137 --> 00:32:09.897
We've got all this money sitting here that we can invest.

00:32:10.678 --> 00:32:22.678
But, you know, family offices often get put into that category, you know, unless you're a multifamily office and you've got hundreds of millions of dollars just sitting in capital accounts ready to invest.

00:32:23.458 --> 00:32:28.877
Which is so funny because I might be up against a firm that truly has no money.

00:32:29.250 --> 00:32:35.717
and they might have more credence with banks because they're going to go talk to financial groups whenever they try to make a deal.

00:32:35.778 --> 00:32:46.130
And so it's created some challenges for us, but I think we've built enough credibility over time that we figured out how to navigate it and we've got the right partners to do deals with.

00:32:46.981 --> 00:32:47.811
Yeah.

00:32:48.113 --> 00:32:51.565
So let's let's role play for a second, right?

00:32:51.565 --> 00:32:53.434
So I'm a private equity group.

00:32:53.516 --> 00:33:00.440
And, um you know, we're talking about buying versus building, and maybe the hold versus sell thing.

00:33:00.440 --> 00:33:03.840
So like, walk me through what questions would you be asking me?

00:33:04.241 --> 00:33:12.205
You know, if I'm private equity group, and I'm, you know, thinking of buying building or hold versus sell, and, you know, Jude comes in, what questions would you ask me?

00:33:12.807 --> 00:33:15.938
That I think that people out there might be wondering about.

00:33:18.998 --> 00:33:25.518
Well, you know, both sides should have a lot of questions whenever you're doing one of these deals.

00:33:25.837 --> 00:33:34.057
You know, and I actually, I always approach every conversation as though it's a two-way street.

00:33:34.178 --> 00:33:40.657
I really don't like it whenever I go into an interview with a seller of a business and they don't have questions for me.

00:33:40.857 --> 00:33:51.653
It kind of makes me think that maybe they haven't thought this all the way through or, you know, they aren't like logically letting their mind go to the next step of what if this works out?

00:33:52.534 --> 00:33:54.115
Because you should have a lot of questions.

00:33:54.115 --> 00:33:58.657
You should be ready to just pepper me with questions about what the next steps look like.

00:33:59.159 --> 00:34:10.626
But from a buyer standpoint, whenever I'm coming in and I'm talking to an owner, I wanna know everything that there is to know about the business, which all those questions are very fair game.

00:34:10.907 --> 00:34:15.219
And that's something that is always very open.

00:34:15.318 --> 00:34:22.878
A lot of advisors won't let you talk about the other category of questions though, which is, you know, what makes a good deal?

00:34:22.878 --> 00:34:25.617
What kind of transaction structure are you looking for?

00:34:25.617 --> 00:34:27.938
You know, do you want to stick around after closing?

00:34:27.938 --> 00:34:31.498
Do you want to roll some equity and be an equity owner in the deal?

00:34:31.838 --> 00:34:38.338
Are you more interested in an all cash deal or would you rather have more upside where I built a little earn out into it?

00:34:38.338 --> 00:34:48.297
And, you know, there's several of the major firms out there, advisory firms that That's the moment, that's like the first time the advisor is gonna say a word during the interview with the owner.

00:34:48.297 --> 00:34:51.204
And he's gonna say, whoa, I'll stop you right there.

00:34:51.204 --> 00:34:53.387
We like to let the market decide.

00:34:53.967 --> 00:34:59.362
It's like, well, like where's this market you're talking about?

00:34:59.362 --> 00:35:02.795
Like he's a seller and I'm a buyer.

00:35:02.795 --> 00:35:05.898
Like I think this is the market and we're talking here.

00:35:05.898 --> 00:35:10.981
uh And really, I don't know how...

00:35:11.054 --> 00:35:24.038
seller can get the right deal the right fit for himself unless he's able to advocate and say What I'd really like to see is this kind of number for my company and I might say well That's a little bit too much.

00:35:24.038 --> 00:35:36.001
But you know, okay Let's see if we can structure a way to get there Because let's say a business is worth ten million dollars, but an owner really needs fifteen I'm not gonna pay him fifteen million dollars in cash.

00:35:36.001 --> 00:35:42.003
I mean, it's just it's a pipe dream to think that just because we have a blind bid process, I'm going to get there.

00:35:42.003 --> 00:35:43.443
It's not worth that.

00:35:43.742 --> 00:35:58.867
But if he tells me I really need to see a top line number of 15, I might be able to figure out a structure that says, what if I get you eight in cash plus a seller note that gets you another two and then some earn out that gets you another five?

00:35:58.867 --> 00:36:04.309
And between all of that structure, we have the possibility to get it to 15.

00:36:04.309 --> 00:36:08.610
Now, because there's an earn out in the deal, I need you to stick around for three years.

00:36:08.615 --> 00:36:11.947
and help me hit these numbers so that you can get your last five.

00:36:11.947 --> 00:36:19.873
uh But I would never get there if somebody said it's a blind bid transaction, you just have to guess at it.

00:36:19.934 --> 00:36:26.297
Now, on the other hand, the person, the seller who's talking to me should be asking me a lot of questions as well.

00:36:26.297 --> 00:36:29.340
Like, you know, hey, where does the money come from?

00:36:29.340 --> 00:36:32.786
Like, how are you going to have money to buy my company?

00:36:32.786 --> 00:36:35.764
Like, uh that's a really valid question.

00:36:35.864 --> 00:36:42.702
And I've seen a lot of private equity groups and sponsors get really offended by that question?

00:36:43.324 --> 00:36:48.315
And I'm gonna honestly have to wonder like, is it an act being offended by that question?

00:36:48.315 --> 00:36:54.567
Like, if you act really angry that somebody asked you where your money comes from, like, is it because you don't have money?

00:36:54.567 --> 00:36:57.586
uh And usually I think that's probably the case.

00:36:57.586 --> 00:36:59.228
Like they just don't have any money.

00:36:59.228 --> 00:37:04.228
ah Okay, what's your track record in doing deals?

00:37:04.228 --> 00:37:11.552
Like not just have each of you As partners done deals on your own in the past, have you been part of a firm that did deals?

00:37:11.552 --> 00:37:16.407
But you guys together, like as a group, what deals have you done?

00:37:16.407 --> 00:37:18.036
What's your deal history?

00:37:18.197 --> 00:37:19.599
Why is that important?

00:37:19.599 --> 00:37:31.226
uh Most independent sponsor groups start because people who have experience and other walks of life and who have done a lot of deals say, bet I can do that on my own.

00:37:31.226 --> 00:37:34.068
Let me go start my own little independent sponsor group.

00:37:34.148 --> 00:37:49.134
But that's where so many of these things fail because, yeah, whenever I was a member of Bain and Company, I could go in and make an offer on a company and really effectively execute on that transaction with a team behind me.

00:37:49.134 --> 00:37:56.420
But now that I'm oh Joe Schmoe Independent Sponsor Group, maybe a bank's not gonna take me as seriously whenever I walk in the door.

00:37:56.481 --> 00:38:02.005
And so it's a very good question to ask, where's your money come from?

00:38:02.021 --> 00:38:06.088
And What deals have you guys done together as an independent sponsor group?

00:38:06.088 --> 00:38:07.918
You know, what have you transacted on?

00:38:07.918 --> 00:38:31.851
Show me that you have some some actual experience in deal history and if they can't show you that Then you need to have a very frank conversation say hey, I like you but like how can I get confident that you're gonna be able to get a deal done and uh You know, I think these are uncomfortable questions, but these are these are questions you just have to ask and And hopefully you have a good a good buyer who's willing to answer them Yeah, super cool.

00:38:31.851 --> 00:38:32.972
Well, Jude, thanks for coming on.

00:38:32.972 --> 00:38:34.911
I know we're completely out of time.

00:38:34.911 --> 00:38:47.931
We'll have more of these conversations around portfolios and in the strategies that you execute on one side of the house on the other side of the house where we're helping companies sell and and representing people looking to exit their business.

00:38:47.931 --> 00:38:50.612
So we'll dive in more into that later.

00:38:50.612 --> 00:38:52.692
I'm coming up to Lafayette soon to record.

00:38:52.692 --> 00:38:57.340
But for people listening in, as always, reach out to our guests, reach out to our co-host, Jude.

00:38:57.340 --> 00:38:58.601
Say thanks for being on the show.

00:38:58.601 --> 00:39:06.887
If you have questions around portfolio strategies or divestitures or bolt-ons, add-ons, if you have those kind of questions, there's a contact form at the top of the page.

00:39:06.887 --> 00:39:10.990
Fill it out real quick and we'll have someone from the team reach out and answer those questions.

00:39:10.990 --> 00:39:13.452
Till then, we'll talk to you all on the next episode.

00:39:13.452 --> 00:39:14.335
Cheers, guys.