How ZRG's CEO Built a 17-Deal M&A Engine with Larry Hartmann

21:58It's having those kinds of conversations where a person who's selling you their business thinks it's their one time and they've got to get the last dollar. And I just say, I've been to it. That's not what it's about. Whether you get 94 % of something somewhere else, but it's a better environment, you enjoy yourself, you'll be way ahead. So find the right cultural fit, find the relation. So it's educating and talking that way. And if someone doesn't value those things, if it's a pure financial play, there's probably someone who's going to outbid you and outbid me. That's where I get a little struggle with it.

22:26I got a couple. I got one deal. It's direct proprietary, no banker. The other one's got an advisor on it. You can tell they're kind of sitting in the middle, pull the founder off the email chain and want you to communicate everything through them. Where the other person, you're grabbing the cell phone, you're talking through something, something they didn't like on the NDA, you pick it up and just start handling it instantly. In some ways, I feel like it slows down that relationship development. But that gets down to your M &A machine. Like how are you creating opportunities? We have a pretty fixed process in ways we get pipeline.

22:58I've got 10, 12 deals in my pipeline right now. And some come from, we have an internal team that does recruiting that finds deals. We have a one buy side banker that's bringing us deals. I speak in industry conferences and talk about M &A and people know we're in the business and reach out directly. I look at the deals that are on my backlog right now, probably one out of eight is from a banker to us versus us initiating and finding the opportunity. So it's possible. It's long-term dedicating time to it. It's spending time meeting companies ahead of when they're thinking about wanting to sell them, knowing you, your story.

23:36I guess that's the advantage or disadvantage. I've been doing this for 20 plus years is I've been always thinking about the meetings I have today may not pay a dividend today, but they could in two, three, four years. So I've got to build long-term pipelines. That's true. Do you convince people to sell? Do I convince them to sell? Yeah. There's got to be a driving reason within them that they want to consider it. I'll ask people sometimes, hey, what's your plans with business? What are you going to do? Are you going to hand it off to your kids? Are you going to retire? What are you doing? And sometimes they haven't thought about it.

24:09I think engaging a founder, what are you thinking? If they haven't thought about it, I'm getting them to think about it. And then I'll go down the road of, listen, And my advice to you is if you're going to sell it, you should sell it five years before you want to be done. And that's usually that day. Usually when I'm talking to somebody, they're not 20 years away from wanting to retire. They're not loving what they do every day. They've been doing it for a while. They have something happening that they know that they've got to think about a transition. We get a lot where they think about selling it to the existing team that's there.

24:38Well, I want to maybe turn it over to my employees. And we'll educate them on the math and challenges of how that generally doesn't work. and how it's not better for them and how we've got lots of stories of employee purchase businesses end up just handing it back to the old founder because they don't want to pay the notes. And that's the discussions two, three years before they want to sell. And then when they do, they remember the fact you were thoughtful helping them think about it. If you have key people, you can still incentivize them. You can still provide some equity type of options and things.

25:05Absolutely. Is that part of it? When you're talking to these founders, you're inquiring about what their exit or sort of what the plans are for the business. and then saying, hey, you need to bring up, you're thinking about exit five years ahead. And then your M &A program, the role of equity seems like a big upside. Are you bringing that stuff up in those conversations as well? Or do you wait till later when they've expressed interest to sell the business? Once we present a structure, we'll show them the math and we'll lay it out very clearly over five years, how it all works, what the upside could be, what their earnings will be during that period.

25:38But there is also, how do you incent the non-founders? Because there is often, I mean, We're looking at a deal right now where the two founders probably could retire. They've handed off most of the business to four other folks in the business. We have to lock in the four people who weren't equity holders. So I was just going through the structure of what we're going to do on that. And that one is we've got to have part of the earn out shared with the non-owner group. We've got to make sure those four other people are locked into four-year contracts. We've got to make sure they buy in or we're not doing the deal.

26:06We had another one we just closed. It was a spinoff from another private equity firm. They had bought a legal recruiting business and it was part of a bigger legal services firm and they weren't paying attention to the recruiting side and they wanted to sell it. Well, the team that worked there for 10 years had no equity. So now I'm just, if I buy it, I'm paying the parent company for the business. That's a risk because now you've got a business you bought with employees that aren't incentive at all. So we approached that one where almost 40 % of the proceeds would go to the management team that was there.

26:36We told the parent, you know, listen, we'll buy your business, but I can't buy your business and those people leave. So if you want to sell it, we're going to have a significant amount of proceeds that are going to get paid to the team that stays. First is, but we've created the businesses. Yeah, but to sell it, you can't sell it without those people going along. It ended up being a successful deal that we did. The management team was thrilled because they went from no incentive into a pretty significant incentive. In that case, there's that thinking about who are your key people and how do you lock them down.

27:02It's not always the selling shareholder. I'll throw another question at you around this. You've got a proprietary deal. You've got a controller building relationship. I've had another deal where I reached out, but then all of a sudden it's like an advisor. Hey, I've already got this advisor retained. And they're the ones that come back and reach out. And what I'm realizing is that there's a number of meetings that you have that gives you more certainty. And then this is where I want to tie in the culture piece to it because the better I understand the culture, the better I understand the certainty that close-close this is going to work out.

27:30And I'm just curious on just your advice. Is there a certain number of meetings or just certain things that you really want to get to to get that level of certainty? And then what do I do in the advisor situation? Do I demand to have those kind of that same level of engagement? The advisor side, you need to be friendly and engaging with the advisor or they can steer a deal away. So if they see, hey, you're difficult, you're not high probability of closing, they're going to push that seller to someone who has high probability of closing. So I'll start with the advisor. There's a separate sale to make to the advisor that you have capital, you're serious.

28:06I always tell the advisors, we've had 100 % of letter of intents have ended up in closed deals and we've never repriced the deal. That's what they want to hear. They don't want to hear, oh, you're throwing out terms and you don't close things. Or by the time you get to the end, it's going to be different. And these are true facts in the deals we've done. So I have this process to make sure the advisor knows we're real, we have capital and we're good guys to work with. Now you shift the other side, you got to spend time with the company. And we do that in a couple different ways. It'll be the social setting.

28:35Let me get to know you. Tell me about the business. Then we dig in and do the diligence. But often, and we're doing this right now, before we make an offer, we'll have a session where we want to sit down and talk about the next five-year plan. And we're doing this, I'm in two hills right now, where before we've got the numbers, we know what we want to offer, but we got to get that owner engaged in helping us think about what are the growth drivers on their side. And as part of the fun discussion, they get excited about, they get lit up about, oh my goodness, I've always wanted to expand into this.

29:02I always want to have investment into that. I've never been able to do that. So I find that session to sit down and say, hey, before we can finalize an offer, let's spend some real time thinking about the synergies, what we could do, and let's create a framework for a plan. Now, that does two things. It creates the working rapport that you need. It creates kind of the framework of a deal, but it also creates what you're going to tie back to some incentives that they've been a part of. So if you throw some numbers at them and say, hey, if you do X, I'm going to pay you Y, it's less impactful than, hey, we come up with this five-year plan and it's pretty ambitious.

29:33But if you hit 80 % of that five-year plan, you're going to get a great extra super earn-out. And we've done that where we'll have a standard structure. And if they hit a real big number, we'll say, no, there's a super earn-out. Well, it's a super earn-out. Well, okay, hit that really big growth number, we'll pay you even more. It's the process of engagement that through that is how you build trust and you build a business chemistry with a firm. And even with an advisor, they may sit in on that session, but they're not going to be adding much value to you having a strategic business discussion about growth.

30:03Yeah. So you're really thinking through five-year plan. What do they see? What are some of these things that you may be able to enable them to be able to do? Because other firms cut that short. They don't spend time on it. No, because you've got your diligence checklist, Larry. That's why. You want to sit there and check boxes off of... That doesn't make someone want to work with you. But a vision of a dream of building something with a business. the sports business I told you about. When I sat with Len, and I remember it was during pandemic and we met at my house because you couldn't meet in person anywhere, but we met on my deck.

30:33We said, what is it you want to do, Len? He says, I want to have the biggest sports recruiting business in the world. I said, what does that look like? The Corn Fairy today has the biggest one. It's 9 million a year that they do in this sector. I said, okay, what do we need to do that? We need to build college sports. We need to build Europe. I said, okay, let's build a plan out. And we built out the vision. He got excited about the vision. I said, I'll fund that vision. We're going to do that. take us time. We've executed 100 % on that. Talk to Len today. It's like everything you said, I said, it's what you said.

31:00I just pulled out what you wanted to do. And we built that plan and it's been successful. So he bought the dream and the dream ended up being something I could back and grow. There's two different hats. There's minimize risk. That's one hat. And then there's maximize value. That's another hat. And they're selling rapport and there's getting them to want to work with you. I just still maximize value. It's like part of it, right? It's like, because Because it is like, hey, I'm sharing the same vision. You're sharing your vision with me, but now it's becoming our vision. I think you're right that it does get cut short because when you think about due diligence, it's not maximized value.

31:34I guess one is like, how do you strike that right balance? Because I'm doing it right now. I'm looking at a deal. I'm literally only thinking about minimizing risk. For us, we're fortunate. Diligence is done by a QAV with an outside firm and a law firm. That's just diligence. Check the box. What are the financials? What does it say? Legal. That's a check the box. But the rapport building and the building the plan together, that's high value work to get to a deal that would want to work with you at a price that may be less than someone else. But it also sets the table for hitting the ground running to have a successful deal.

32:05And it gets into what is it we're going to do after we're together. I mean, that part about you could buy something and in six months you don't agree on direction. That's the wrong time to have the discussion. It's not going to work. So to me, that part about saying, hey, let's agree on what it is we're going to do, how we want to do it. And some stuff is certainly contingent on hitting thresholds and margins and all that kind of stuff. But it creates a better working relationship, too. It's a strong point here. It's to really put as much emphasis on the maximized value, referencing buyer-led M &A as a framework.

32:35A key component of it is just early integration planning at the end of the day that you should be doing it in parallel, which it seems like it's what you described. It's almost getting that alignment. Can you tell me a little bit more? Is there anything that you do specifically to connect diligence or even diligence findings with like your integration or just integration planning in general? We have a plan for every acquisition. Each one's a little bit different in terms of what we want to do based upon how fast we want to grow and expand. But in our world, and again, these are people businesses.

33:04We have a mantra that we tell the companies that first thing is do no harm. We're buying you for what you want. Then we're going to bring you the good things about being part of our platform. So we bring good things. We give them a global footprint when they might be regional. We give them technology they didn't have. We take off the things they don't generally like. We're going to take off HR, IT, and accounting. We can do that for you. But then over time, we start to integrate in a deeper way. So our thing on integration is lay out with them what's it going to feel like, but don't disrupt them too early in the first three to six months.

33:35You can get overwhelmed with change and let them continue doing what they're supposed to do. So we've taken our time on it. And sometimes it's a year process to really get them into the fold where they're on the same CRM systems. We're connecting all that up, but we'd rather get the financial performance than perfect integration. We can figure out the accounting integration being perfect later or the IT integration. Test is numbers first and culture and clients. Don't screw up what they have with their clients, with the culture, and they take your time on the other thing. It's just catastrophic if you screw up a deal.

34:06Yeah, don't piss people off. Yeah. How and when do you communicate this? hey, there are going to be some big changes that we do after close, because I feel like this is where things go rise. People get blindsided by it. Then people get pissed off. That may be in the third or fourth meeting. We're talking about the business plan moving forward. Yeah, before. Yeah. Or maybe part of it. But in our world, they know that it's do no harm, bring the good things and then integrate. That's the playbook of how we describe it. And that's how we live with that. Now, it may be a 12 month process. Sometimes it's been a two-year process.

34:37So I think it's understanding the business. Some have deep brands, deep customers with for us contracts that are complicated. We bought a business in the higher ed space, had been around 40 years. They had contracts with universities that are tough to get MSAs to switch over to another firm. So we didn't want to disrupt contracts. We wanted to keep things rolling. That one may take three years to fully integrate the contract side, the billing side. We can make that work. Internally, it's more work for us, but externally, the clients don't feel any different. Does it end up like different? I'm assuming most of your deals are like asset deals.

35:07Does that end up being like a stock deal than later on? We've had to do a few stock deals. We always try to do asset deals, but there are more stock deals than we probably care to admit. Well, like the example when there's like this sort of long MSA in there, does that end up being more of a stock deal? Yeah. There is value in the value of the contracts and what they have in that side of the business. Luckily, we've had flexibility to do both, you know, both stock or asset deals. I'll let the lawyer get into the weeds in the next interview. This is good in terms of getting integration. A lot of it's communicating early, setting those expectations.

35:37The big bid-ass spread, it's one I'm curious about, and I'm noticing it. I'm sure you run across that. I know we're in different industries, but especially in software, people see what the VCs are investing in 10, 20x revenue, and then their expectations are so high. How do you manage that? Because a lot of the companies I'm looking at, it's like you're not in triple-digit growth. You're pretty stagnant growth. And they have a misaligned view of their value because of what they hear? Yeah, exactly. I'm just curious, like, have you encountered that? How do you sort of get that rationalized? We're in a world, the multiples are not that.

36:13I wish they were. We're trading at companies in the five to seven times EBIT number, nothing to do with revenue, it's EBIT. So it's low multiple. We create value through lots of earnings. But that being said, especially when we're doing proprietary deals, the people have a misinformed view of what their value is. What we'll do sometimes, we pull out public company comps. In our world, good or bad, our public company comps are corn fairy, hydrogen struggles who don't trade at great multiples in general. So we'll educate them and look at the public company comps in our market of what things you're trading at, give them an indication where we are and explain to them, we have to have some arbitrage between what we trade at and what you trade at.

36:52And this is what the market is. If we're trading at a six or seven, we'll buy something at a four or five. And there are deals that when we tell them that, they go away. And a year later, they come back sobered up and realizing nobody's paying two times revenues for their business that is worth 40 % of that. The first time when buyers see a price and it's proprietary deal stuff, 50 % of the deals blow up at that point because they're just unrealistic. And you're at a point you don't have deals. It's like you're pretty programmatic about how you... Oh, sometimes we get the price quick just to screen it.

37:24Yeah. We need to give you an idea of what this would look like. We'll refine it through diligence, but here's how we're thinking about it. Because they'll say, sometimes we'll get clues that they're unrealistic. They'll say things about value. And so we need to make sure they understand the market or go get educated about the market. And we're competitive in our space on buying businesses. We're not going to be the highest, but we're the most active in our space of anyone. We've got some credibility to tell them, hey, no one's buying more than we are. And this is what the market is. But there's comps.

37:52There's the second bite of the apple. It could be like, hey, you know what? We're going to share this upside Whatever we get valued at next, you're going to get a good chunk of that in your value. Looking at the situation when you have proprietary dealings, one thing dealing with the founder directly to try to get realistic expectations on value. Then the advisor is another one. Maybe they're not running a full auction process, but they're running that kind of targeted type of approach. And some of it's almost like they're fielding out bids and you almost feel like you're bidding against yourself if you put something out there.

38:24You don't want to just be thrown. You know, because they almost like are creating a little bit of this distance where you're not having that table seat conversation. Or maybe you should. Maybe I should be at the table with the founder to start presenting the terms. My gut is you're going to have a hard time competing in auction. I mean, it's just tough. If they're out really going to 100 companies, they'll find somebody that wants to buy a software company at a price that's probably, you know, a stretch. And they tell you they don't. They tell you like, oh, we've just got a few companies looking at this.

38:52And I'm just like, ah. I think it's finding a sweet spot where you know you can do something other people can't. We've bought a lot of businesses, call it$10 to$30 million in revenue as add-ons to our platform. That's too small for our public companies, comps, for Corn Fairy and Hydric to want to buy them. That's not worth their time. And it's too big for the boutiques who don't have capital to buy them. So we've figured out a little bit of a sweet spot of like, hey, if it's a deal in this size, we can be competitive. If I get a banker calling me on a$50,$100 million deal and they're shopping it, I know I'm not going to waste my time.

39:25They're going to go out to everywhere. It's going to be price sensitive. It's not about really like there's a point where it's not about relationship or it's going to be about price. If I'm in your shoes, it's OK. Where could you find deals that are not going to be as obvious to everyone else, but they're great for you that you could find a little bit of a competitive advantage to win those deals or create those deals? So I wouldn't want to be competing against other software companies that are 10 times your size with a better multiple. I agree. That's where I'm looking at the smaller like three to five million revenue companies.

39:57That's a good size. There's not a lot of others that look at it. Yeah, especially small for them to hurt their head. Especially if they're stagnant. If they're stagnant, then you got a founder that wants to leave. Yeah. All those sort of things becomes less attractive. Yeah. You'll find your sweet spot. That to me is what you do is you come up with the box of what is it that you can do that's attractive, that falls in a range, that's not going to be 10 firms bidding on it, that you waste your time. Because you can waste a lot of your time on the wrong deals. I'm big about not wasting my time on a deal that has no probability of closing.

40:27And I can sense that, I guess, just with age, you get a sense of that. But from an initial conversation or two, I get a feel whether, okay, this is a deal I should spend time on. Have you ever bought a deal out of the chaos? In terms of turmoil? Turmoil, stuff going on. Maybe just some real issues are going on and you got to roll your sleeves up and do some fixing. No, I mean, it's funny because our private equity group likes the idea of broken toys, buying things that used to be profitable that aren't now. And I'm like, I don't want to fix it. There is a philosophy of doing that. It's tricky.

40:58Now, we've tended to find, again, our sweet spot is it's profitable. It's got a certain revenue size. They want to stay as we talk about. I mean, I'm probably pretty clear about what really fits. And then the stuff on the fringe. It's like, no, we're not doing that. We pass on a lot of deals that lots of revenue, no income. And it's like, yeah, but if we did this or did that, or you owned us, we'd make money. It's no, we're not going to gamble on that. I think, I don't know if it's me just having the Indian blood, like I'm opportunistic. I'm always looking for a deal. There is a way to do those deals.

41:28We've done one that way where we bought the business on future EBITDA only. So we'll buy you and you show me you're going to be profitable. So I'm going to buy you off what your profits are at the second year. I'll give you the formula because they'll say, I'll wait to find profitable. It's like, no, I'll buy you now. You tell me you're going to make $2 million in two years. I'll pay you four times that number in two years. That's the year now. And I'll help you get there. So it's better risk than you doing it on your own. So I'll pay you nothing now, but I'll pay you in two years on the earnings you generate.

41:55And I'll take some risk off. You don't have to worry about IT and accounting. How do you keep from weird things happening? Are they like, fire everybody in the second year? Just to... You got to feel good about the people and the reason. Yeah. And that's something. The broken toy thing is tricky. And there are certainly firms that make a living finding challenging things, stripping costs out, figuring out how to make them profitable. We've just gone a different direction. How do you think through strategy? I think one of the things is I'm looking at these opportunities. They're very obvious. They're stuffed directly in our space, which overlaps in capability.

42:25And I'm just wondering if we should be more strategic looking at the broader universe and adjacencies that would be more cross-sell opportunities as opposed to very similar types of assets. I'll give you the parallel to what we did. Started off the exec search firm, first private equity investment. We went from$10 to$40 million as an exec search firm. Then it was our clients have more needs than pure exec search. They have interim needs. They have consulting needs. They have RPO scale-up needs. Let's take advantage of the fact that we're having conversations with CEOs, boards, and we can address those needs.

42:58Us, this last four years, we've been diversifying. That's been part of the strategy. But there's that, do you have some scale to fuel across sales? And we had scale. We had 100 managing directors on the search side who were finding opportunities. When we started getting in the interim space, half their business came from the search side of our business. So definitely there's adjacencies that can make sense. in the early days, if it's a small piece and you're a smaller piece, is it really going to fuel, is any part going to fuel the other, right? Are you better off pouring into your core business?

43:30And then when it's larger, look at the diversification a little bit more. Obviously the strategy will evolve as you grow, but in this early stage, and maybe it's just valuation arbitrage is basically what I'm bidding on is at least get big enough or over 20 million revenue opens up to a different pool of investors and different valuation multiplier. Yeah. You're in a good spot. You're valued on revenues at high numbers. So it is worth some gambling for sure. If you can find how to aggregate to get to the size and scale where you're going to get the better multiple. So again, you got to be careful that you don't buy and then it disintegrates in three years and you're at 50 % of the revenue level you bought it at.

44:06No, that's why you want the steady revenue stream. Yeah. Finding the right private equity partner. Yeah. Dating. Teach me. Now I'm starting to take it serious. Yeah. In the beginning, I had a little ego and it's not, we're going to doing well. Like I didn't, when I wanted the money, you didn't want to give it to me. I don't need the money. You want to give it to me. But now it's like, oh, there's some good private equity firms out there. They're not all bad ones. There's some bad ones, but they're not all bad. There's some actually really good ones where I'm impressed. I've had them on the podcast.

44:32You're just highly sophisticated investors that I could see. I would love to work with some of these people. They would teach me some things. They would challenge me. They would help me grow professionally. How do I go about finding them and making sure that those first few dates, you don't jump into the marriage too fast and find out you got to get a divorce? My first private equity raise, I did the fundraise myself. I'd say it's probably a mistake. We were 10 million in revenues. We went to the Mez Finance world and reached out to a bunch of people and had a bunch of meetings. It would have been better if I had someone representing us.

45:01The second process, we had a banker that went broader. But at the end of that process, it was finding someone that aligned on the strategy. There was that time to say, let's, you know, same thing you talk about doing with someone you're buying. Does that PE firm strategy and belief in what you do, are you aligning on that? Are they the kind of firm that puts an operating partner next to you? Are they kind of firm that's hands-off? Are they a patient investor? We were fortunate that we did a lot of recruiting for private equity firms already for portfolio companies. So my team could tell me who fired their CEOs that I didn't want to bring on that would get rid of me.

45:35You know, let's bring a new CEO in. Who sticks with management? Who's patient? who decides they want to change things out. There are thematic approaches PE firms have of how they deal with founders, management, patients, downturns. And it comes out through the history of looking at other portfolio companies. So my advice to you would be, if you're going to go raise capital, it's a lot of time. We'll go through a process, get term sheets and get to know a few and pick the best one. This is a good time if you have a good business. PE is always looking for great investments. And then the diligence is probably around past portfolio company CEOs.

46:08that have exited and are in place and talk to them. Reputation, I agree. I'm starting to feel that out where I talk to good folks I know and I ask them. Yeah. I'm getting a sense of that, which I think is important. It's like you get a good referral to a lawyer or any other provider. It's meaningful. Running the process is interesting. I guess one thing I was thinking about was it seems like when you're over 20 million revenue, it opens up your horizons to more of these sophisticated, a little more sophisticated. I feel like when you're small, you have everybody reaching out. Yeah. Yeah. It'll search funds and just random people.

46:40Yeah. And some don't have money and they want to take your deal and go find money. That to me is always, yeah, you can waste your time on something. I'm wondering if, hey, can I lock in an opportunity, a couple, one or two of these targets, and then use like a post-acquisition performa to, maybe I'm getting a little ahead of myself here, use that to say, hey, here, we're going to put this company, maybe this kind of company together, get us about a 20 million revenue and then share. Oh, that's it. Yeah. No, that's absolutely a strategy. If you found a bigger deal that was more expensive than you wanted to do, let's say it's equal size to you.

47:13I'm in the process of raising capital. Here's what we can do. I'll pay you X multiple around closing a deal. And you and I will be part of closing the deal together. You come to that private equity firm and say, I've got growth plans, but I've got a deal right now that'll close as part of the deal. They love that. Then you could get that valued on a post-acquisition. You're going to get some arbitrage on it. You're going to get the scale of a bigger company. And when we go to our processes and we'll be in the market again in 9, 12, 18 months, in some periods for our next private equity investor, I want to have a$50 million deal sitting there for that next investor, but bigger than what we would have done.

47:47It's probably not a deal I would do today, but it's a deal I would do with that next investor who's got a bigger appetite. And it'll be sitting there ready to close. And I can go to that company I want to buy and say, hey, I could pay you a little premium on the multiple. You're going to be part of my process. and I've already started those conversations now with people that I know actually are a little bit bigger than I want to buy today and just say, hey, if you want to do something end of the year, I'm going to be in process. It might align really well with your size and what you think your value is.

48:14So, you know, it's absolutely put a deal together with a deal is a great strategy. PE loves it. Okay, that's actually good to hear. So that way I get upside of target valuation of where I wanted to be at around the 20 million mark. No risk unless the deal closes. Like it's kind of an if then deal. Yeah, there's still going to be dry powder based on the terms that we'll go continue doing more deals. It should be a good win-win. What do I need to do to pitch that? Do I need to just come up with a performance? What should I be doing to pitch that kind of... Certainly, you need your five-year plan and what it looks like.

48:44And then you got to be able to go and... Five years out. Okay. I would think so. I'm always thinking a vision. Again, it's always first two, three years are pretty much a plan. But then there's a vision of what you want to build. Because you've got to sell that vision to the guy you want to buy. and then finding that deal to say, hey, I'm going to be in the market. Are you interested in being part of a private equity transaction? We could do this together. And here's how I would think about value. And it'd be part of us getting this done on a deal. And you can go pitch that. I would save that for a deal you think is too big for you to do alone today or that maybe is a stretch on price that you say, I wouldn't take that risk on a deal where I've got more scale, I would do it.

49:22Let's talk about wealth preservation. So, because that's a big question. I'm in a fortunate spot where I bootstrapped everything to this point. I got an option pool to take care of the team members in the company. And we're growing. We're in the 40 plus percent year over year growth. And I have confidence we'll maintain that for the next few years. So part of me, when I look at this, the capital, it's like, I don't really want to dilute the equity right now for the organic stuff because we don't really need it. We've got good cash reserves and we're growing nicely. But the acquisition makes it interesting.

49:50but then you're like, leverage as much private credit as possible or even better, have the seller who are now to hold some paper. Get them to take some of the risk. Maybe you get the right private equity partner that's going to bring this level of sophistication where I don't have to overthink this capital structure like you described. I mean, that to me sounds like your dream. Again, most private equity companies will look and say, hey, if we're buying you, can we put four turns of debt on you? And they're going to go get a debt commitment ahead of time. And we did that. It was initially with a bank, but the banks just grew conservative.

50:18They reached out and made it a private credit transaction. So part of that right private equity firm is they're going to put debt on you anyway. And how much of that's going to be dry powder you can draw down on. And hopefully you have both equity and debt to be able to grow with, which we're fortunate to have both. It makes sense to have both because they're going to get better terms on the debt. That's what I'm realizing. A bootstrap company, the banks are not friendly. No, when you're private equity back, there are lenders that will lend to you. If you're not in your private, they won't. What kind of terms are you getting?

50:47I'd say private credit is more expensive than a traditional bank, but in a private equity setting, interest is an ad back. And we're a positive cash flow business that's profitable. So I would say this, and it doesn't really matter what the interest is you're paying because it's not how they measure EBIT for valuation. Whether I pay 6 % or 8%, I don't have a cash flow problem. And it ends up being the same net income either way because it's an ad back. I'll tell you, the bootstrap, it's 16 % interest only. And then to buy down to 12, 13, you're giving up a lot of warrants. That was our first round.

51:18We did a MEZ deal with MEZ debt in the 12 plus range, plus equity and preferred returns. But it gets better as you go along. We get the right investors. Yeah. I mean, we were with banks at 150 over LIBOR and all that. But if you want to keep acquiring things, the math is great. You can pay more in interest to go do accretive deals that create value. Your first investor was a minority or majority recap? Minority. Minority. Yeah. First deal was a minority deal. That's what I was thinking. and do minority. Yeah. Get comfortable with it. What does that end up being? Like 30 %? It was 30%. Okay. I ended up buying out a partner.

51:49I had a 50-50 partner who didn't want to go down the road of bringing on capital and I was getting bored and it was kind of like, I don't want to just keep this business as a lifestyle business. I want to go raise capital and he didn't want to. The first investor said, we'll buy him out. And I said, that's great. When you bring this capital, it's sort of, here's a percentage allocated as primary capital to grow the business and then here's secondary. There's some of that secondaries to buy out the partner and then if you wanted to take some off, you take some off? Yeah. And I didn't take any off on the first deal.

52:15Second deal certainly did. Okay. Yeah. So then I started to dilute myself. So yeah, I went from a two thirds owner up to the first deal to I'm probably down to 8%. I'm down now, but it's also that percent is of a lot bigger number. So to me, dilution is not dilution if you're creating more dollar value, which... Yeah, confidence, which you're going to execute. I know it's important to hold on to equity, but at the same time, when we took our company public, the first company, the three partners or two other partners and myself, we own 51 % of the company, but we never diluted to buy anything. I look back, I should have bought.

52:47I mean, we had public company currency. We were a publicly traded company. I could have bought a bunch of companies with stock. We could have gone a lot faster. We didn't do that. They were my first business. I maybe didn't understand how to drive that. You brought up having private equity as a partner can be helpful. They are helpful. I tell people, if I wanted to screw up this business, I couldn't because they wouldn't let me. I have a good board. They're smart. They keep an eye on things and certainly we're all aligned so having a private equity partner to help you keep an eye on things is a blessing for an entrepreneur you know because at the end of the day you're creating value and you're gonna create a business that sells for a significant generational wealth changing kind of an event so why not have oversight these are smart folks who know how to create value that's why i always looked at it is i'm gonna keep polluting myself but as long as i'm creating enterprise value that's meaningful to me it's yeah that's what it is turn a cheek on And like I said, there is good investors out there.

53:40Yeah, there are. No, I've had great experiences. And it's finding the right ones who you align with that you build a good relationship with. And it's no different than, like you talked about buying a company, you need a relationship. You need to invest time where it's not just quarterly reviews of numbers where they know you. What's the craziest thing you see in M &A? There are certainly deals that we've been involved in. You find out things afterwards with behaviors, relationships, things you didn't know. There's always things there that sometimes you have to clean up and do. Not that crazy, but I think we've had some deals that, one, we bought a business in the interim space that was a really good business.

54:16It was a larger one, and we made an offer, and the owners literally thought they were worth like a tech company, like one of your companies. And it wasn't. The valuation was like off by 70%. It was a great business. And these were founders that were, they were like 80 years old, but they had an annuity business in the higher ed space. And they just had a completely unrealistic view of what the value of their business was. And it was just like, wow, we went down all this road and they came back with just like crazy demands. We ended up 15 months later, closing the deal at a reasonable number. Sometimes the reactions you get on valuation can be a little bit crazy.

54:50In general, the founders have been, and they haven't done things that are noteworthy in terms of stories of craziness. But how do you present your offers? Are you doing it in person? Like, hey, this is where we're at. I remember back in the day, you send a fax and then you wait for a response. Because we do a lot of these. And I know that only one out of three offers is going to move ahead anyway because of unrealistic expectations. A lot of times we do it usually in a Zoom meeting with a PowerPoint with a full built out 12, 14 page presentation. We don't send it ahead of time. We walk through why we love your business, what the deal hypothesis is, what we see the business being under our framework.

55:29Here's how we structure the deal. We show them all the scenarios of what the total value would be with our stock if our stock goes up. Because I think, again, total return is we model out like if we get a 2, 3, 4, 5x return on the stock piece, this is your net number. And again, reiterate our growth strategy to them, why that has a realistic chance of happening and walk them through a whole storyboard. So it's a pretty well thought out hour presentation. And that precedes any letter of 10. It's selling them on the vision, getting their buy-in. Then there'll be some back and forth. And then it leads to a letter of intent from there.

56:04We're selling the good deals. I mean, we want them. We're trying to grow. It's not picking. We always say that about recruiting. Top talent. You're not just picking top talent. You got to recruit them to join your team. Good acquisitions, it's the same thing. You've got to convince them to be part of what you're doing. Some people make the mistake and treat it like, like you said, if you're just doing a financial transaction, it's a financial transaction. you'll get a financial seller is all you're going to get. We're convincing people that probably wouldn't want to, or maybe aren't sure what they, what they want to do to do it now with us.

56:36Cause we're the best option. It's a journey. Yeah, but it's fun. I appreciate that where you guys operate because it's by 40 % of my day is an M &A deal structure negotiation. It's a constant and every deal is different and every structure is different and every owner, buyer, seller is different. So it's a whole lot of fun. Larry, Thank you so much for taking the time to have this conversation. You've helped me become a better M &A scientist. I appreciate the time. It's great to brainstorm and talk about things going on and getting deals done. So good luck to you and your endeavors and appreciate the time and interest in what we've been doing.

57:08Fellow M &A scientists, if you listen this far, you're right there with me. I'm hoping you find this content valuable. I love to hear from you. If you do find it valuable, reach out to me on LinkedIn. like getting feedback, connecting with folks that actually have the patience to listen to this long-form content. And ideas. You got some other topic ideas. And criticism. I welcome it. I'll take it. That's how I get better at doing this. Until next time, here's to the deal.

57:45Thank 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 312-857-333. 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.

58:30Again, that's mascience.com. Here's to the deal.

58:44views and opinions expressed on mna science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual this podcast is purely educational