How to Build a Roll-Up Machine

24:32That's not always easy to find, but I think it's the most important thing about starting up an initiative like we have. Have you found any questions or topics that you could bring to conversation to help sniff that out? Yeah, sure. I'll mention one, safety. Safety is an important part of demonstrating to your employees that you value them beyond the financial metrics of how much revenue they create. It's an important part of being a good leader and taking care of your people. There's a lot of investors that are thinking about, hey, we're invested in this business. We're going to exit in three or four four or five years, whatever it is.

25:12We've got to hit these metrics. I've got to return so much appreciation to my investors on their investment. And I'm not really interested in hearing anything about what you're doing in your business with regard to safety. Many investors could care less about that. Hit my numbers. That's what's important. Don't bother me with talking about safety. We invest in safety. It's a priority for us. It's a part of building a great culture. In the long run, it's part of building a great company. We are very much aligned with our investor in that regard. In fact, their expectation is the first thing we talk about in a board meeting is safety and how we're doing at taking care of our folks.

25:49And we invest money in technology and leadership and management time to improve our safety performance. So that's maybe, again, a small example, but you can multiply that over almost every kind of a discipline in the company where you want to be aligned with your investors on how you approach topics like that. Because if not, you'll end up running into problems as the business evolves and as you have to make hard decisions about difficult challenges that come up. I see how that can lend into other areas based on what's important to the way you run the company. Then you can really get a sense, do they care?

26:28Do they lean in or lean out? You'll have things on deals that you do. You might be in diligence and find something about a company that indicates they're not going to be a good fit. Sometimes it's best to walk away from a deal. And again, investors might not be aligned on that, but they're looking at it through a certain lens of only the financial impact and not thoughtful about the importance of building a good culture and creating a strong leadership environment. Every day, things like that will come up. And the better alignment you have, it's never perfect. The better alignment you have, the less time you spend wrestling over issues like that and the more time you spend building a good company.

27:05How is it negotiating terms with investors? I'm always curious about this. You have this idea of what you want to build, but you're early in terms of pursuing it, but sort of managing equity for the management team versus the investors and just making sure that there's good equitable interest and you can get those terms aligned for the long term. So I am probably not the best person to answer that question because if I was an investor I didn't know very well, we would have had more negotiation because of the relationship I had with Concentric prior to getting kicked off, we didn't have to negotiate because they proposed a structure that was absolutely met our needs.

27:50And honestly, they care as much about the leadership team and our success, both financial and otherwise, as their own. They wouldn't have proposed a one-sided deal. Again, that's part of picking the right partner. If it's just a financial transaction, then negotiating is a big part of it. We were committed to building something special. They knew that it only worked if the deal worked out great for us. We knew it only worked out for them if it was a great deal for them. And we didn't really have any challenges come into agreement on the terms of the deal. So there really was not any negotiating to be done.

28:26So not to get specific on your situation, but just broadly ballpark. If I were to pitch a roll-up as a new sort of de novo project to an investment firm, my targeting, is there a range I'm targeting in terms of equity? I want to have reserve for the management team. And is it just generally the management team or is it kind of the founders? And then you sort of look at a broader pool for the employees. Yeah, so it's both the founders and the management team. But the amount is going to depend on what you're bringing to the table. So it depends on how much cash you're bringing to the table. There's going to be an investment.

28:59The investor is going to put up most of the equity, but certainly they're going to expect founders to write checks and to participate in that. So how much big of a check you write will be one factor in how much equity you get. the strength of your business plan, the track record that you have. If you're new and you've never done it before, you're not going to get the same kind of a deal as someone who's done it successfully three times, has three good exits, and is now going to start their fourth. So how competitive it is, if there's a lot of investors chasing it because of the strength of the team or the industry or the strength of the plan, you're going to have a lot more negotiated leverage.

29:35It's hard to say. I made this rage quite light now. Are we, hypothetically, are we talking like 10 to 30 %? Yeah. Oh, yeah. Something in that range. Again, it depends significantly on how big of a check the founders are willing to write. But yeah, something in that range. Okay. So that's a big part of it. Yep. There's a lot of variables that go into it. It goes into that. Fair enough. So we get to that point, we get terms agreed on, and then we, let's do it. Where's the next step? What happens? They just hand us a huge check and then we're off to the races? The check's not written until we get a deal.

30:07So we were still operating on our dime. They agreed to back us, pending us getting the first deal to the table. So we were very aggressive in going out and finding deals. We found two early on. One we closed in March of 22 and one in April of 22. And it was when we closed those deals that the company got funded with the initial chunk of equity to get started on. And then we were off to the races from there doing deals and then integrating these companies and putting them together and helping them to improve. Those are great. What's the pitch? Because this is interesting. You're hunting for the first deal.

30:45And obviously, things have really matured from the first deal you've done. How many deals have you done on the current platform? 19. 19. So in just over three years? It'll be three years in March. It's just under three years. Under three years. That's incredible. A great start. What's the pitch? What really lands when you're talking to these companies in terms of talking to the founders and just getting them on board of it would make sense to sell them to your platform? That's a great question. And that is a real important component of our success. So first, let me just describe the kind of owner we're looking for.

31:19We generally, we could put a perfect profile together. It would be an owner of a company who's run it for a long time. Maybe it's a generational company that was passed down from father to son with an owner in their, let's say in their 50s, who is starting to think about, hey, at some point I need to have an exit plan, but I'm not ready yet. And man, I've been running this business for 20 years and I haven't had a vacation in a while. And I sure would like a little bit of a change in lifestyle. That's our perfect profile. And then our pitch to that owner is, hey, look, we have an opportunity where you can recognize a big chunk of the value that you've built in your business over all these years.

31:59Give you a chance to diversify some of your personal net worth and recognize some of the value that you've created, but still give you a chance to run your business because these guys run their businesses with their same brand in a very similar way they were running them before they did a deal with us. And you'll become a part owner in Leap Partners. And you'll work together with a whole host of other really sharp, interesting, fun people to work with to help us build this regional business. And then at some point down the road, we'll sell and you'll have an opportunity to participate in the value and wealth that we create over the course of building this regional business, LEAP Partners.

32:40And by the way, you're going to have a big team around you. We're going to take off the back office stuff that you hate to do, payroll, taxes, benefits, insurance, marketing, fleet management, recruiting. We got teams of people to help you with all that stuff. So you're going to get a little bit of your life back and you're going to have an infrastructure around you that you're going to be able to take a vacation and you're going to have a lot of the good stuff you loved about running your business is going to continue. A lot of the frustration and things you didn't like about your business is going to end and you're still going to be an owner in a big company that is really doing something special as a group.

33:16First of all, I'm going to look for specific characteristics in the business. So we're looking for potentially these generational business, the owners in their 50s or beyond. They're thinking about exiting, maybe even what that may entail is in terms of a lifestyle change, be able to have some more autonomy in what they can do, take a vacation. I'm sure there's other elements, like we talked about the emphasis of values and culture. So I'm sure you're looking for, is it similar to what you're looking for an investor or are there differences? So I would say, yeah, there are some differences. So there's a lot of really good owners out there that are running these companies, as you can imagine.

33:50Great people. If I could characterize the one thing that separates the ones that are a good fit from us from the ones that aren't, is that they are open to learning something new and curious and have a kind of a curious attitude towards business. The owner that is not a good fit for us is somebody that says, I know it all. I know what I'm doing. You can't tell me what to do. I've got this down. I'm as good as it gets. That person is not a great fit for us because we were all these owners, these 19 owners. We meet regularly, we get together, we share best practices, we learn from each other. So the best fit for us is someone who likes the idea of being part of a team, enjoys the participation of helping other locations out and then learning from other locations and sharing ideas.

34:40And has the approach that I want to make my business the best it can be. And that means I need to be open to insight and input from all sorts of different places. They have that kind of mentality, then they're a great fit in our organization. In tech, we call it a growth mindset. Yeah. Yep, it really is. It's that mindset and that kind of passion for always doing better. And if I had to say a second thing that's really important is an owner who is committed to their team and to develop in the people that work for them. Because as we grow, we have lots more opportunities for leadership roles, and we want to fill them internally by developing and growing our people.

35:21Some owners are very happy doing everything on their own and telling everybody what to do and not really invest in your own. There are people, better business owners, delegate and help their team take on new tasks and new experiences and learn from that and give them leadership opportunities. And that's probably a second element that's really critical for someone that we would be pursuing. Strong leader that develops their team. So we find all these attributes where we got profile the owner, profile the business, all check off, look good. The pitch of the owner is that, hey, you can size down some of your responsibilities, you get become part of something bigger.

35:58Like together, we have a story how we're going to make something a bigger business in this market, get to basically the next chapter, and frankly, less crap work for you to do. And I'm sure there's other elements in terms of what's unique to your company, operational efficiencies and things of that sort. Does that sound about right? And then the second bite of the apple, the private equity pitch, the second bite of the apple, hey, we could get some chips off your table, get that boat you always wanted, take that vacation. And then, hey, you're still in it for the next big one, which looks like a great story in terms of getting you a return that's going to be stronger growth than you probably would have just running your business.

36:33And we're going to help grow your team so that when you do get the point where you're ready to exit, you're going to have a great team of folks that are going to be ready to step up and assume those responsibilities when that time eventually comes. I'm ready to join your biz dev team. I got the pitch down. In terms of execution on these deals? What have you learned? We got 19 deals down in three years. I know I always talk about buyer-led M &A. You already lend to some of the key attributes, which is like building your own pipeline. You can't just hire, get a bunch of advisors bringing you deals.

37:05You're out there with a clear profile, going after, talking to owners. You got the pitch down. But what have you learned in terms of executing these deals that make it successful? I'd say a couple of things. One of the things I've learned over the course of my career is a profound respect for the entrepreneurial spirit of the hundreds of business owners that I've met, ones we've done deals with and ones that we haven't. It really says something special about our country, our culture, that we have an environment where the door is open to people who are willing to take a risk and bet on themselves to create these awesome businesses, to have a whole group of employees whose lives are better because of the risk that they took.

37:48So one thing I would say is just a profound respect for the achievement of these small business owners. So what have we learned? I think what we've learned is that there's so many opportunities to find really good run companies. I hear a lot of folks talk about they can't find deals or there's no good deals out there. They're out there. It's just like everything else. You got to go out and find them. You can't wait for them to come and knock on your door. So for us, that's about building a reputation. We want to be the buyer of choice in the Southeast. We want to be the company that when business owners decide it's time to consider that, and they talk to some of their friends, that we're the one they talk about as being a trusted buyer who's going to honor the business that they built, the brand that they created, that's going to take care of their employees and help them to grow and build that business.

38:45business even after a deal was done. So that kind of a reputation is built one deal at a time. One of the things we do is we share a list of our partners, these former owners that are now our partners. We share their contact information with every seller that we talk to because we want that prospective seller to know exactly what all the guys that have been through this with us think about their experience and how we treated them, how we treated their employees. Because there's lots of opportunities, as you know, when you go through a deal process for things to go awry, for there to be a conflict between a buyer and seller.

39:20And our goal is to handle those conflicts in a constructive way and earn the trust and confidence of our partners throughout the whole deal process. So that really is a key objective as we're doing deals in a pretty small geography in the Southeast to earn that reputation as being the company that everybody wants to sell their business to when the time comes. Respect the owners, build a reputation. What else have you learned? I know you got a pretty short timeframe. You mentioned before, it was like 45 days from start to finish on these deals. Yeah. I'd say another thing we learned is the importance of aggressively integrating businesses and getting that done quickly.

39:58So you mentioned our 45 days. We average actually 43 days between signing an offer letter and closing a deal. And we can do that because the team I have around me, we did 45 deals in the security business 19 here. So we've done a lot of deals. And it's like anything else. If you do something and you practice it, you get better at it. So we've got a team that's very adept, an internal team at getting through the diligence process. We have great partners, a great CPA firm that does our accounting work and a really good legal partner. And they know we do things fast and they understand that's an expectation of theirs that they keep up with us.

40:38So we get to close in 45 days and then we get right to the integration. So a lot of companies that do, we do put off the integration and say, we can do that later, we'll wait. But getting on the same financial system, getting everybody on the same HR benefits platform, getting on the same field software, we do that quickly and get all the pain of that out of the way because it is a bit of a distraction. But get that done so that we can get to running these businesses and working on building and growing. That's probably the biggest learning over the course of doing all the deals that I've done is if you want to do deals quickly, you can't wait to integrate because they just kind of back up before you know it.

41:20You got five companies you acquired, none of them were integrated yet or halfway integrated. And then you have to take time off from doing deals because you got to spend a year attending to the integration of the businesses that you put off. So that's probably the most significant thing that we've learned that has set the stage for us to be able to do deals as quick as we do. What have you learned related to operational efficiency? Because we make that part of the pitch to the investors, but then I'm really trying to get a reality check because even our models, we can get so synergy happy. You're just in the right numbers and this and that and the deal to look good.

41:53But reality, what actually was your synergy and what were the surprises that maybe countered those synergies? And you're right. It's very easy to say, well, hey, as we put these businesses together. We're going to cut these costs. We're going to improve productivity. We're going to do X, Y, Z. Those things are hard to do. Those things always take longer than you think they will. And in fact, this is maybe a little bit of a learning for us. We've learned that, hey, we impose some costs on these businesses right away. Initially, the benefits is a really clear example. The companies that we acquire generally will have not as good of a medical benefit package as we do.

42:32So when we bring them on board, we put them on our benefits plan, which they're all generally very happy about, but it costs us a little more money than the company might've been paying before we bought. So that's an example. There are synergies that are real, but there are, in some cases, you can, you take a step back before you take a step forward. In a sense, the synergies that are first and foremost, there's purchasing synergies, No question about it. As you get bigger, you get a little bit more leverage and you can negotiate better deals with suppliers. That takes time. It's not easy. It's not fast.

43:06It can be time consuming to do it, but that's definitely there. But it doesn't come day one. You have to build enough of a business to get the attention of vendors to get them to recognize that and be a more aggressive in price. The synergy that is the most impactful but takes the most time are the operating efficiencies. And that is, number one, building a system where you can provide the folks running these businesses with the data they need to make good decisions, train them on how to look at that information and be able to evaluate it to decide what to do, and then execute on that. And that's often training of employees when you learn, hey, our close rate isn't as good as it should be, or we're not selling as many service agreements as we need to, whatever it might be.

43:53Those things just take time. My caution would be, assume it's going to take longer than you think, and don't build and bank your business on just those synergies. Those should almost be added things that make your financial success even a little bit better. But you want to be careful about banking too much and certainly not being way too aggressive, which a lot of folks are on how much money they're going to save when they do a bunch of deals. Do you factor revenue synergies at all? Revenue synergies? Yeah. Yes, but in the sense that through this work that we do in building this operating model, we're going to train these branches, these locations, they're going to get better at that selling process.

44:37They're going to get better at presenting options to customers. They're going to get better at offering more, and that will drive up revenues in the long run. But there's no immediate short-term revenue synergies that come as a result of getting a deal done. You wouldn't factor that in your model then. You sort of look hindsight and say, hey, there was some gains in terms of us putting better training there. But when I bought the company, I'm not justifying a higher price by saying, here's revenue. Oh, yeah. No, that does not enter into our deal valuations at all. Okay. That's actually helpful.

45:11So it's really looking at the business in the current state and trying to price it fairly in the market. We look at a three-year history, financial history of the business, and our valuations are based on that, not based on what we think we might be able to create as a result of synergies after a deal. The partnership with the owners, what does that look like post-close? We have a great relationship with the owners. They're super people. They're phenomenal leaders. They're motivated and enthusiastic about what we do. Keep an open door. What else do you do to really keep them engaged? We do three face-to-face meetings a year where we get together.

45:44It's best practice sharing. We do regular monthly Zoom sessions. as we review financial results and talk about who's doing well and giving the opportunity to share things that other folks can learn from. We have regional leaders that manage a group of branches, maybe six or seven branches, that actively support these general managers. You're going to need more vehicles next year. Let's talk about what we can do to help make sure we're ready so you get the vehicles you need. How many people are you going to need next year? We're going to have to get some recruiting lined up. So there's a lot of engagement from that standpoint.

46:19But the most powerful thing is putting them in the same room with other owners and having them talk about what's working and what's not working. Yeah, it's interesting. If you think of the private equities portfolio support model, it's like you have your version of the companies you're rolling up. Yes. What's the craziest thing you've seen in M &A? Particularly in this space, companies that do roll-ups and don't expend any effort to integrate businesses they buy. and then just assume they're going to find someone to write them a big check because they put three or four businesses together on paper.

46:51That was a phenomenon you saw a lot of a few years ago. And it was largely, I would guess, a factor of the circumstances. There's a lot of money that wanted to get into this space. And there were a lot of buyers chasing not many deals. My sense is that has changed. And the folks I talked to today are much more interested in valuing platforms that really are integrated and really are businesses, not just a collection of independent businesses that hadn't been put together on one financial statement. That was a bit of a surprise, but I think the circumstances over the last 18 months, that's shifted a little bit and there's a lot more attention being paid to how well are these businesses integrated and can you demonstrate some performance as a result of the fact that you pulled these guys together.

47:37That phenomenon of somebody willing to write a big check for companies that are just taped together. To me, that was the craziest thing I've seen in M &A. Yeah, that's a really good point. The industry overall has just increased the awareness and emphasis on integration. Probably since I started this podcast eight years ago, it's just like continuing being emphasized even to public burning call conversations. Hey, you did an acquisition. Great. Tell us how you can integrate it. That's spot on. It's what industry needs. That ties back to just being buyer-led. Are you really thinking of that from the beginning, having a plan and executing it?

48:11when you don't do that, that's not, that's being seller-led. So great example there, John. John, this has been a great conversation. I can't thank you enough for taking the time, schooling me a lot of things around roll-ups, helping me become a better M &A scientist today. I appreciate it. I love, this is a topic, as you can tell, I really love. I enjoy talking to folks from all different industries, because there's always something you can learn from what someone else is doing. So it's great to have the chance to do this, and I appreciate you making time for me to share some. my experiences. Follow M &A scientists.

48:43If you made it this far in this interview, I hope you got some takeaways out of it. Always welcome the feedback. Reach out to me on LinkedIn. Let me know topic ideas or the criticism I always welcome as usual because that's how I get better at doing this. So next time, here's to the deal.

49:11Thank you for taking the time to explore the world of M &A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M &A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kisan, K-I-S-O-N, at mascience.com. or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter.

49:56Again, that's mascience.com. Here's to the deal.

50:20Thank you.