When Integration Beats Roll-Ups with Tim Hall

21:58Some of them will want to put some equity in alongside of you into the deal. But there's four or five firms that we use that really just show us executives. We'll say, hey, we've got a thesis in the homeowners association space, and we have two people showing us executives there. We've yet to find that person. Part of it's complicated by a lot of them have non-competes. So we got to find the right time to pull somebody out of one of those companies. But those are great resources, using the network of bankers, of lenders and things like that. One of my most successful deals, a banker introduced me to an executive that had started as a drywall salesman for his father-in-law's company, became CEO of that, sold it to a large strategic, had the entrepreneurial bug, and wanted to go start a company again.

22:36So I met him in 2010. He had no job and no company. Two years later, he got a single branch location up to$2 million of EBITDA. We invested then and we invested in a bit of an unusual way. We put a small amount of money in his pocket. Most of our money went on the balance sheet to provide cash to go pursue the acquisition strategy. Three years later, we had acquired nine companies. We got to$58 million of EBITDA and had a very successful exit. But that was an instance where I just asked a bunch of bankers, do you know anybody? I've got a thesis in the space. I need an operator to get started. And it took me two years of courting that inventory to get a deal done.

23:10Wow. So it's such a key element is having that right operator that can really scale and run it. And the recruiters you mentioned that are getting more into space. I know you mentioned they invest co-asside, but some of them want like part of the comp is like a piece of equity or something. I don't know. Some will ask if they can convert their fee into equity and some will take the fee in cash and then write a check. But it's really in one pocket out the other. I was like, that's pretty interesting. I should get into that. Yeah. Again, the nice thing, if they're willing to take their fee and roll it over into equity, they must believe in the individual.

23:40They must believe in the story. Absolutely. That gives you some more confidence. Big piece is getting the right operators, networking from all angles, and making sure they're well-incentivized in the equity structure. And then building pipeline is another key element. It sounds like you're doing that even before you had that operator locked up. We are, because we want to make sure it's there. We want to make sure there's actual... You're actually validating your thesis. I know, I'll tell you this is a side thing. I was trying to do that with the data rooms. But then here I thought, oh, there's 100 data rooms you can consolidate.

24:08We owned like a small data room product. It'd be nice to just do a pure cost energy, kill everything and just migrate the customers over. What I come to find out was actually building pipeline exercise validated that there was only like five real targets. They were terrible. There's something wrong with them. Either extremely high valuation expectation or just terrible operators in some place. Yeah, so we want to see a broad range of targets because for every 20, 25 companies you engage with, maybe you get a deal done or something like that. To do 200 add-ons, the portfolio companies that have been involved have probably talked to 2, 3, 4 ,000 companies to actually get there.

24:44So we want to see breadth. We want to test that part of the thesis before we do the deal. So that'll involve making calls, doing surveys, knocking on doors. Sometimes we do that ourselves where the companies are relatively easy to identify. Let's say they're licensed, for example, which they are in the funeral business, you can get a list of operators in particular states, and you can start making calls. We also will use third parties to do that, buy-site acquisition search firms that have fairly substantial research organizations. Many of them have it offshore. They will scrape publicly available information based on criteria we give them, and then we'll have a funneling process where they bring it back and we do a weekly meeting with them and said, okay, we've identified these 100.

25:21Which ones do you rank A, B, and C based on whether they fit your criteria or not? They'll obviously then focus on the A's. They'll make calls. They'll do letter writing campaigns. The goal of that is just get us a conversation with those people. There's a range of those type of firms I've noticed. There are some that are full end-to-end and they typically want a percentage or some kicker. Yes, they typically get a percentage of the deal size and enterprise value with a minimum. And then there's other firms that do more of just the data aggregation. They either just give you the data or they just set up meetings and then they'll leave it to you.

25:52And then some either just have a monthly retainer and no kicker. Sure. In our experience, we've generally liked the firms that are more full service. They typically charge a fee that's some kind of sliding scale Lehman type formula where it's a large percentage of the first million, but then it gets down pretty quickly to a point to two points of the deal. There usually are minimums on those, which can create a challenge if you're buying lots of small things. But many of those firms will let you cut those minimums if you do several deals in a year where they're getting enough leverage on the fixed work they did.

26:22But that model we tend to find more efficient. And if you can find things on a proprietary basis in a sector where a consolidation makes sense, where you're going to have synergies, pay an extra two points to a broker that found you the deal. We'll never make a good deal about it. You do both. You find your own deals and work with the brokers. Are you paying, like at this stage where you have a thesis, you're validating the thesis by building pipeline, you're paying for that out of pocket? Yes. So in the HOA space in particular, we are paying a buy side search firm right now who has not only a success fee, but a month of retainer.

26:52And we've been doing that for the last four or five months. We hope it'll bear fruit. If it doesn't, that's part of the nature of the business. We take a lot of dry holes and every now and then you find a gusher. How to pay to play. Yeah. I do like that view of scaling it because I never thought about using a buy side. It helps you leverage our relatively small team. And then one of the things that we've talked about the early days of the process that changes over time, once you're in a space, you've got a platform, you've acquired a couple of companies, it becomes much easier. People hear about you.

27:18In every one of our companies, we have a dedicated M &A execution person that helps identify the companies in the funnel, do the diligence, qualify them, get the deal done, and then either go through the integration process or we have a separate individual that will handle the integration component. So that person is full-time dedicated to that industry, making contact with people in the industry, going to all the specific industry conferences. But what we found, if you do M &A well, you acquire companies that fit culturally, you acquire them in, you retain the people, you show opportunity to those people.

27:49Our best acquisition deal sources are the deals we've already done. They bring along a local competitor or a friend, somebody else they know from the industry association, something like that said, look, I sold 80 % of my company to XYZ platform. It's been a great experience. Why don't you come talk to us? And that's a huge source of deal. So I mentioned in our funeral platform, we have right now 40 live discussions with potential targets. About half of them come from the first handful of companies we've acquired. They're people they know from the funeral directors meeting or the state board or something like that.

28:19The Sun Tzu quote, opportunities multiplies, they're seized. Can you help me understand how you size a market? Because when you mentioned consolidation, you're building pipeline and you're looking at it by region, or you're looking at by revenue, location. How do you size even the funeral home stuff? You can go across America, but... It's fairly easy to get national data. When you're getting down to state and local, it obviously becomes much, much harder in most industries where you just can't find that level of data. But if you know how many funeral homes are there in Ohio, it's 800 to 900. And you have some idea of the volume that they might do.

28:54And you can even get some of that information publicly because most funeral homes post the obituaries on their website. So you track enough of those. You can figure out, yeah, this person did seven calls last week and five the week after that. But you can then apply some fairly simple metrics to most businesses. So we know what the price of an average service with a barrel, we know the average price of a service with a cremation. You can go up with some size, what does that market look like and probably be reasonably close. And then you can do the same for many businesses where if you have a couple of those metrics on the pool service business, if you tell me how many weekly service calls somebody does and what market it's in with where we know the weekly service price based on that customer segment, you can come up with a pretty good approximation of revenue.

29:32Or you can do it by looking at the number of trucks they have in the picture on their website. We know roughly what a truck will produce in pool service revenue on a weekly basis. So there's lots of ways to come close. I notice every industry does that. They find something like really obscure that you don't think about. It's not in the P &L. But the operators always know. Exactly. Because that's how they think about it. If I add a truck, I'm going to spend X dollars on incremental labor, and I'm going to produce three times that in revenue. So the operators usually know. Yeah. So there's either a number of trucks, a number of chairs in the office, like whatever it is.

29:59But that's your real metric. Those are the unit economics that an operator probably thinks about in their head. And maybe it's not on a big spreadsheet, but that's really what, that's how the money's made. Yeah, you can't lie down the numbers. It's just, here's your hard asset. You know how much money you can make on it. Okay, so we start building a pipeline. That's looking good. And then when I go out and I go raise money for this, this is kind of interesting too, because I feel like some people are really lucky. They come from a private equity ecosystem and they just have friends to call. Yep.

30:25What if you're not? You're just, me, the kid from the street. begin to start networking and really... And to me, I feel like it's a relationship and it takes time to build. It does. Look, obviously, it's easier if you have a track record, you have a long, tenured experience doing this in the private equity space. If you have meaningful personal capital to put into the deal that creates that alignment, that makes it a lot easier for an institution to say, hey, you're putting three, four,$5 million in this. I'll do some multiple of that. But if you're young and you're starting out, you don't have that, you're going to have to network really hard.

30:55You're going to have to be scrappy. You may have to make some sacrifices on the terms to create that alignment where maybe it's a graduated return structure where you don't make that much of the profit if the deal's less than a two or two and a half times multiple of capital. But if you do better than that, you worked it real hard, you showed you're scrappy, then you can get the kind of more normal economics. I'd say for people that are young independent sponsors, the good thing is in the last 10 years, but really in the last five, there's been a huge increase in the amount of interest of investors in independent sponsored deals.

31:27They generally like the lower end of the middle market where most of us focus. You can buy single-digit EBITDA companies, often outside of an auction. You can put the deal together yourself with a team and a thesis. They don't have to commit to a blind pool fund for 10 years where they're paying a bunch of fees. They can decide whether or not they want to do that deal. It is a lot of work. You're going to get a lot of no's. We started 18 months ago. We went narrow that down to a group of five, six, seven people that two of us, we've done multiple deals with. They're in each of our platforms or at least two of our platforms.

31:59And the remaining, we think there's a high likelihood we can get a deal done with them. They like our investment style. They like the end of the market. They've done a bunch of work on us as a team and know what we're like. So it's going to take a while to work. I'd start that process early. There's obviously some conferences you can do to go to that that are specifically independent sponsor focused conferences. We've gone to many of those. Like a lot of things, it's a probability game. Give you an example, we went to the McGuire Woods conference last year. There's probably a thousand independent sponsors at that conference.

32:27You have 30 meetings, 40 meetings over the course of two days. And a lot of those meetings go nowhere. But we found the investor who's the lead LP in our last deal and one of the two lead LPs from that conference. It does bear fruit. You're in a business where you're going to have to have a lot of no's and a lot of swings and misses, but you'll connect every now and then. Independent sponsor model and also search funds have become extremely popularized. I don't know what they're doing in the MBA programs, but so many of them are coming right now. I think there's actually an acronym for it that they have.

32:54If somebody knows, tell me. I forgot what it's called. But it's basically the entrepreneur. MBA right to a search fund type platform. Yeah, yeah. Going to be in a search is like a thing that's called. It's like a big trend right now. Because I get them. When I was running Deal Room, I get a lot of inbound inquiries. I'm just... Yeah, it's an interesting model. So that's the blend of the independent sponsor, but somebody that wants to be an operator and actually go run that company. Yeah, exactly. And you're talking about like pretty young. So it's, you know, we're at a lot of advice. Yeah, look, I took a much more conservative path at a business school to go work for GE Capital because I frankly needed the paycheck to pay off my loans.

33:25But if you have that optionality, you're young, maybe you don't have family obligations, you're still a single individual and you can afford a swing and a miss. It's a great thing to try. Okay, so let's break down the difference for those who may not be familiar. Search fund is basically you're going to find a business, you raise money, but you're actually going to operate that business and you run it through to an exit. So you're going to do one thing as the sourcer of the deal. the operator for the next three, four, five, six, seven years. And then as an independent sponsor, why don't you take that one?

33:53Yeah, you can do that across several platforms. You're not going to run it. You're going to build the thesis. You're going to identify the platforms. You're going to build the executive team to run that for you. And if you're successful, have your hand in several different things at a time rather than be dedicated to one. Now, how's the business model? Traditional private equity fund is typically a 220 management fee and then 20 % of profit share. What's that look like between other models? Yeah, so I'd say a key difference is the 20 you mentioned, the carry or the equity participation, in my experience, is often structured in the independent sponsor world where you earn less than that below a 2x.

34:27Maybe it's 10%. Above a 2x, you can earn 20 or in many cases more. If you have higher return hurdles, you hit a three or four times multiple of your capital, you can typically see a premium carry. The other difference though is you do not get the 2%. That 2 % is on the fund's committed capital. So not just on the invested capital. You only get fees typically from the actual underlying portfolio company because you have no investors that have committed to you to charge that 2%. Ah, interesting. Most will let you take a deal fee from the company based on a percentage of enterprise value, 1 % to 2%.

35:00Some take it in cash. Some roll it over into the deal. Most will let you take a management fee, percentage of EBITDA, usually with a floor and a ceiling. And the idea of those is just to keep the lights on, not to make you rich, but not have you worrying about, hey, am I going to make ends meet? And can I do this for the next four or five or six years? Because that would not be in the LP's interest to have you thinking about something else. But the money really will come 90, 95 % of it on the equity piece, not the fee piece. So that's probably the primary difference, which means you've got to have enough of a nest egg to go without comp for a while, to invest some money in dead deal expenses, due diligence expenses on accounting or legal or travel that didn't turn into anything.

35:38That is one of the challenges of the independent sponsor model. It's going to take you some financial commitment to do that. Exactly. And then on a search fund, you won't have some of that because it's just directly going in the company. But it goes back to more of the equity incentive or is there different? Yeah, you would normally have a very similar equity incentive for putting that deal together and running it. And then you'd have a salary from that company or something like that. Got it. So can we, when you talk about getting the money, you talked about some different investors, but what are like the walks of life of different investors that you'll find for your business?

36:09Yeah. So I guess I've found them in a couple of main flavors where we focus for our types of deals. One is I generally like family office investors. They have substantial capital. They have usually a singular objective, which is return on capital, multiple of capital. They typically, if some member of the family is involved or maybe only one generation away, they made their money doing something like this. They made their money being an entrepreneur, starting a business, growing a business, building a business. We've liked those types of investors. And then we have other institutional investors, but we've really gravitated towards smaller firms with a dedicated focus on or a significant focus on the independent sponsor model rather than a generalist firm or public money is one that I just generally avoided that tends to come state pension funds and things like that have all sorts of other constraints and regulatory issues with it.

36:59So we're still refining our model there, but we've got a pretty good stable of relatively small people with a dedicated or significant independent sponsor model and family offices that can write substantial checks. You've pitched a lot of investors. I have, yes. What's it like getting a yes? It's very gratifying. It never comes usually in one stage. So it's sort of just like your diligence on a deal. It's a progression of signals and signs. How much time are they spending? Are they digging in? What types of questions are they asking? Who is attending the meetings? Who's attending the sessions?

37:31is that the senior folks, the decision makers on the team, I've been fortunate that two of the three investors, actually all three of the investors are well-known to other friends of mine from the business, have invested with them in the past, supported them in their evolution from independent sponsors to many cases, a funded sponsor environment. That was very good kind of mutual comfort, the investor being able to do due diligence on me through people that are already invested in and me being able to understand what are they like as an investment partner. So seeing their interest, they're asking questions, They got some more senior folks attending.

38:03Yeah. Flirting. A lot more flirting happens. I always tell the people the more questions they ask, generally, the better I feel. That means they've done the work. They've read the material. They've been in the data room. They've been through our investment memo. They're trying to figure this out. You kind of get that inclination that these people are really interested. And then how do they deliver the yes? They call you up and be like, we're in. Again, it's usually a series of stages because they have to go through their own committee approval process. We'd like to do this. What are the terms?

38:28What would my allocation be? Do they need to do the whole deal themselves or are they willing to split it with somebody? In our first and second deal, we essentially had one large institutional investor and then a fairly substantial number of friends and family. These are prior colleagues of mine, executives that work for past portfolio companies, bankers, lenders, things like that. In our last deal, we had two institutions with the idea of let's broaden our investor base. instead of having two or three people, let's make sure there's five or six people that want to do deals with us that we will soon be able to call repeat partners on deals.

39:00How do you frame that? Are you telling people directly, hey, our goal is to get five different investors on this or is it flipped around? Are they the ones, you know, hey, we're interested in maybe - So it varies. Some of the people that we are talking to, if we're looking for in the last deal, there was$47 million of equity, could do three, 10, 15, something like that. They wouldn't fill out the whole deal themselves. There are others that are capable of doing the whole thing and want to do the whole thing. And then in this case, I went to the partner that wanted to do the whole thing. They were our sole institutional investor in the last one and said, look, we want to diversify our base.

39:31We love you guys. We want to do more deals with you, but it's obviously necessary for us. You're not going to want to do everything with us to have multiple people we can call on to build that base of five, six, seven people that they're really going to be our go-to calls. And instead of calling 60 people in the future, we're going to call 10 and have a high certainty that two or three are going to want to get there. That's interesting. I always had this assumption, less the better. You got less cooks in the kitchen and it just streamlines everything. I ask who's strapped a company all the way up.

39:58Give me the thinking on why you want to diversify investors. One is simply because not every deal is going to fit with somebody's investment strategy or experience. Strange things happen. Somebody is on an investment committee that had a bad experience in a similar company, or maybe they think it's a similar company and it's not. That gets them to a no. There's a lot of reasons for somebody to say no to an investment. So having some diversity there. But I also think you learn from people's experiences. We treat these LPs as partners. We want to learn from the questions they're asking and the experiences they have.

40:26I can guarantee on every diligence call we have through the cycle, they came up with something we didn't think of. And we go research it with diligence and we figure it out. So I really view them as additive. We want them to be engaged. And in many cases, they're taking a board seat or a board observer seat. They're there to help us learn from the 50 other companies they're involved in. Is there anything you've learned around raising the capital, the board structure that you want to teach me? Like on the M &A side, picking your partners is really important. So making sure that they are in it with us, they're aligned, they want to be in this long term, they're going to be patient capital, they're going to support us to grow aggressively, they're going to be there if we need them in the eventful rainy day.

41:07By the way, we don't ever just leave that to the investor wanting to support the company in the event that something bad happens, and it does. We had the financial crisis, we had COVID, we often always structure our deals so there is callable reserve capital that they have to commit to contractually where we can say, hey, we've got a great growth opportunity or some other global event has happened. And we know if we survive this event, we're going to be fine. We want to know we can call capital. And by the way, I have to put in pro rata along with that. That provides them great comfort that I'm putting in a dollar, they're putting in three.

41:36So that's something that is in all of our numbers. Is that typically like a percentage of the total amount? And that percentage can vary based on how much you think you're going to have opportunity to grow at how much equity financing capability you'll need compared to the debt financing capability you'll have. That really is somewhat dependent on starting leverage and starting size. But it does vary. Typically, the reserve, 25 % to 33 % of the initial check, so a decent amount. Okay. In some cases, I might like to make that larger, but the LP is going to sit there saying, hey, I don't know if you're actually going to deploy this.

42:05I understand having some reserve, but 50 % might be too much. But it's good. That's actually a good thing to have. Then you don't have to scramble around if something happens. Exactly. It helps when you're talking to the company, when you're saying I'm an independent sponsor, but once we get this deal done, we do have callable reserve capital. It's also important to our lending partners. They want to know that we've got capital to support the company in good times and bad. I like that. This is good. I just asked you to teach me something and I learned something totally new. Hopefully there's something I've learned over 29 years that I can share that's valuable.

42:33The board dynamic, I'm curious about that because at some point I have to do it because I bootstrap the business, but I eventually want to support an acquisition. Yep. do I strategically start growing the board now? So it's, oh, I give up the one seat, but I already controlled the other three. Or do I just wait till something happens and then structure it? So I'd encourage you to think about it now. We build our boards primarily as an advisory function, not necessarily a governance function like you might see in a public company. So in all of the situations, we as Brenton Point control the board.

43:03We can appoint and remove people, but we treat those people very much like partners. We do compensate them in cash, equity, and their investment in the deal. We want them to be engaged. We really want to think about them as advisors to us and to the management teams. Our board meetings are not much about governance at all. They're really strategic growth and value creation discussions. What are the main opportunities ahead of us? What are the main challenges and risks we're seeing today? What do we need to do to put in place a team and infrastructure to be successful? How can those board members with their network and relationships help us?

43:35I'll just give you a couple of examples in our pool deal. the outside board member I had there, led a high-level, big-picture strategic discussion after our May board meeting. This is not what's going to happen in the next month or quarter or even years. What's this industry going to look like in five or 10 years? And how do we get ourselves ready for that with people and process and technology? That was very useful. There's also a fairly big procurement element to our acquisition synergies. So he's brought in somebody that did procurement for him in a very large company in a chemical manufacturing business.

44:03He's doing a part-time assignment, helping us figure out where we can get some additional purchasing leverage as we grow. So those are the type of value add activities we like to see the board members doing. They're not just sitting there to be a yes or no vote or rubber stamp something. They're contributing. Be strategic, make sure this board is going to be accretive. Yeah. Do you pay them? We do. Yeah. We pay them typically cash, equity out of the profits interest plan, and then they invest in the company. I can't think of a situation where we've had a board member that did not invest in the company, did not want to invest in the company because they saw the opportunity.

44:34So they get the accretion on that, obviously without paying any carry or anything like that. So what's like the range that you would get? Of board members investments? Yeah, either they're not investments, but even their allocated equity that you give them. We did an advisory board for a company and it was a quarter point over four years for an early stage company. So there's a fairly wide range. Like the cash is the least significant thing. What is that? $75 ,000 to$100 ,000 a year. And that's five board meetings scheduled. Every acquisition has a board call, special topics. Maybe that board member will go help us port an acquisition, assess a new member of the management team we're trying to hire, something like that.

45:11Equity can range from a half a point to two or more, depending on how active they're going to be in helping that company develop. And then their investments have been all over the board. I've had people that do as little as$250 and had one board member who invested$5 million in the company. He was quite happy when we made 5.4 times our money on that deal, that he put a fairly significant chunk of change in his pocket, but he was very value-add. Okay, that makes sense. So you do, if you're going to pay money for them and incentivize them, you want to get the best board member. Okay, so we got the yes.

45:41You know, sort of get the inclination with their interest that they're going to say yes. They say yes, you sign paperwork. And then at this time, do you have deals at LOI or is it just purely fundraise? We already have pipeline, but now we're going to go back to those ones that are hot and ready and start getting them in LOI. Like where are you at with the actual target? Beyond these three platforms that we've done so far, Do we have other opportunities under LOI? I'm just saying like when you're at that cycle of going to execute on one of these platform places, like you raise the money. Yeah.

46:09So generally, yes, something under LOI. So the first platform, we had an LOI. We had a 60-day exclusivity period to finish our due diligence and raise the capital. And raise money. Okay. That's an aggressive timeline. Before this, you socialized the thesis. We socialized the thesis before the LOI. We've identified investors we think will like it. Sometime about halfway through there, when we've done enough of our due diligence, we'll deliver our investment memo, which tends to be a 40 to 60 page PowerPoint deck that explains our angle, how we're going to add value to this. What's the industry look like?

46:41Why this company? How are we going to execute? What's the market dynamic? What are the targets? Obviously, full financial model. And then in the month after that, we're figuring out which investors really want to do this. We're getting them the confirmatory due diligence, whether it's legal or accounting or things like that. So it's a lot to do in a relatively short period of time. that normally that 60-day process gets extended a little bit. The main reason for that is typically most companies that are four, five, six million of EBITDA, privately owned, maybe no debt. It just takes them longer to respond to the due diligence requests than they expected at the outset.

47:13But we can move quickly. Game on. I want to skip over some of those getting in closed steps because we talked about this podcast enough and you can listen to other interviews and get that. What I do want to talk about is integration. You started this podcast with this view that you just can't slap companies together, consolidate revenue. You actually have to build this business. And you talk through the thesis of having a real vision of building essentially an empire that has a strong company culture, a strong brand, delivers value to the customers. I want to understand because so much of what I'm realizing is evolving is integration, thinking around these kind of consolidation plays.

47:49And buyers are actually getting smarter where if they see the smushed together company, they're deeply discounting valuation because they know it's a backlog of integration work to do. So I really want to understand of how do you think through and execute integration? Yeah. I would say acquiring a company is easy. Integrating it is hard. So we focus a lot more on the process around the latter. It does start with making sure you're buying the right team in the culture. They're going to be your partner in the integration. We're going to affect change at both companies, both the platform and the add-on to be able to get integrated, get the synergy.

48:21And that could be everything from procurement, maybe there's some facility consolidation. There's changes to the management structure. There may or may not be changes to the name of the organization, which sometimes has been around for generations. So you want to make sure you have that alignment going in. How do you get some of that cultural alignment instead of what metrics do they look at? Do they look at things like employee retention and satisfaction, customer value, customer satisfaction? Are those types of things aligned with you? And then a lot of us just spending a bunch of time with them, making sure we're having several meetings, a lot of FaceTime, we're walking the facilities with them.

48:53I always look at for an executive. How many people do they say hello to as you walk the floor, you go through the distribution center? How many people do they know by name? Those are good soft indicators of culture that are not on a report somewhere, but they tell you, how is this company run? And what's the overall kind of management style? You can tell when you walk in the office, people are jiving together. You can tell, is the facility clean? Is it neat? Is it orderly? Do people seem energized? Making sure that mostly our management team is spending a lot of time doing that. And then it's having a discipline process.

49:22So we start that before we even begin talking to a acquisition target with criteria. What are we looking to buy? And let's make sure we write that down and we stay true to that. And we don't vary that we said we were going to buy companies with these three attributes. We found one with two of those attributes or maybe some different attributes and you go buy it anyway. Right now you're immediately off strategy. So we write them down. And in the case of the pool company, they really come in what I'll call sort of three flavors. For a larger deal, we're going to move into a new region, a new geography.

49:51We'll call that sort of a hub. I want to find a substantial, capable, sophisticated management team of a certain minimum size. It has to be something where we say we can add other companies to this and they can handle that and they can help us grow this territory or this region. So finding that then allows you to do one step down from there would be what we may call a spoke, right? It's a smaller, less capable company. Maybe it's a couple hundred thousand to maybe a million. it wouldn't be something you'd say, I can double, triple, quadruple this, but it fits into that hub. And the two things are additive.

50:22They're additive now because we can take costs out by having one warehouse facility, or we have overlapping routes for the pool service business where we can start to say, we can make it more efficient. We can service more pools per mile driven. We have a savings on procurement of chemicals and supplies and things like that. We have the ability to provide employees better career development opportunities. Somebody can go from a pool technician to a regional manager, things like that. And then the last one we'll do are really pure route buys, where we're essentially just buying a customer base from somebody who's maybe just tangentially in the pool business.

50:56A specific example, we bought a bunch of routes from a guy that delivered heating oil. That's a winter business. He happened to have this small pool business, but wasn't really focused on it. Wasn't making a lot of money. When we bought those customers, we retained a very high percentage of them. We put that revenue on our existing cost structure. And we had to add some trucks. We had to add some people, but it was right in our existing service area. So we've done several of those, but having those written criteria and to make sure you don't vary from them. And it's not just what does that company look like?

51:22How are we going to structure the deal? So that hub has to have a substantial amount of rollover equity. So we know that person is going to be aligned, helping us grow that business. The route buy has no rollover equity. That's our most valuable form of currency. We don't want to give it away if we're not trying to incentivize management. And then the spoke is somewhere in between. So you got to have both. The culture test is important. The office test. Yeah. Get a good sense of what that's like. But then having a real discipline criteria actually gives you more of something that's tangible in your strategy as well.

51:51Because now you'd be laid out. Here's three different directions we go and why. So once we get that defined, what are the other things that we move into when it comes to executing integration? Because I've worked with your team on this. I've talked to a number of them. I love it because you guys almost work like essentially the strategic. There's a lot of upfront planning on how you... So to get it from prospect to a closed deal, we have a very standardized process as well. We have protocols for a deal above a certain size. We're going to use this law firm. Below a certain size, we'll do this one.

52:21Above a certain size, we're going to do a full quality of earnings review. Below that, we'll do a cash proof with a single individual who does that for us, who knows the pool business. So the approach to due diligence changes based on the size of the company. We tend to have relatively standard, middle-of-the-road form agreements just to make the negotiation side easy. In the example of those route buys, we literally do those with a bill of sale. There's no merger agreement or purchase agreement. It's two pages, and that's about it. We walk away with the assets, which is primarily the customer base, and they walk away with some cash.

52:52So we try to make that a repeatable process, and we track that all in deal rooms for our full team. You can see that, as I said, in the case of Easton and each company, we do have an M &A execution lead. In fact, in Easton, we have two that you've interacted with that really do not focus on the operations. They are full-time deal execution and integration. So they really help coordinate all the resources we need to bring to it. That's the accounting and finance team, HR, marketing, ops team, procurement, all the things we need to do to make sure we know how we're going to integrate the company day one and that we can start acting on that.

53:24Not just day one, frankly. A lot of that stuff is happening before we even close the deal. We're thinking about how we're going to optimize the routes or what the infrastructure will look like or what synergies we think we'll be able to get from our vendors on procurement and things like that. But then it really goes day one where the bulk of the work begins. And this is something where I've used lots of data room products before up until the time the deal was done. And then they just become a filing cabinet for that. But we use deal room to help us execute the integration. So there's 150 point checklist that covers everything that you can imagine from we're going to take control of the cash.

53:58We're going to convert the payroll, the benefit systems. We're going to change the signage if we do that. But a lot of it's around communication. So some of the key things day one is how do we take this company that's just gone through an acquisition? They've worked for the last 20 years for the same founder owner. And how do we give them comfort that it's going to be okay? This is opportunity. This is career advancement opportunity and a broader platform for you. So there's a lot around communication. That's meet and greets. That's town halls. That's written communication. That's our manager team telling people and truly having an open door.

54:27Or if you've got questions or concerns, come to me. We're happy to talk about it. We want you to be part of this team. We didn't just buy some trucks and a warehouse. We bought the people out in the field that do the service. So that initial communication goes a long way to comforting people and giving you the time to get things integrated. But the deal room process tracks all of that. It has all of our communications. Who's going to send it out? When? Who's going to go visit which facility? What are the things we need to do to get the synergies out of the deal? It's across the platform. It's all live.

54:55So all of our checklists, all of our templates, all of our forms are loaded up into there. Anybody in the company that's got access to that platform can see what stage are we. And we're hitting our timeline in the HR and benefits stuff. Is it green, yellow, red? Who's responsible if we're behind? And that includes the CEO who goes on to the platform and COO and look frequently because we've now done in 16 months, eight acquisitions. There's overlapping integrations going on. So we've got to figure out how to balance the team. And then another great thing it does is it lets us track the synergy realization against our original plan.

55:26So are we hitting the numbers that we thought we could on procurement or cost takeout or revenue enhancement opportunity? That's a great way to validate our assumptions, refine our assumptions on the next deal. But when we go to sell and we can show the buyer that, yes, we can improve EBITDA in the relatively short firm on a cost basis by 25%, primarily through procurement, that really helps somebody understand, okay, now I go buy an add-on for five and a half, six times, and I increase EBITDA by 25%. Now I just took a turn and a half or so off the multiple. That is something that will not only create more EBITDA exit, but will create more multiple for our platform to the next buyer.

56:02It's a very effective system. And again, it's something our team uses. We are using it universally across the three portfolio companies, although the one that we closed today is not yet using it, but we'll be committed to implementing that platform there as well. What is this deal room thing? I should put a disclaimer. You're a customer. I am a customer. We use it at Brenton Point. We use it at the East and Select Pool platform. We use it at our landmark funeral services platform. And our company that closed today, not yet announced, will be using it as well. And just to get it straight, you're using it as this platform to run all the deal execution, which is you standardize a process we described.

56:36And then your integration process has also been standardized. And then you will also use this for collaboration. amongst your different teams, like you're supporting your deal leads and then also the function leads that are involved with the integration. And then you also are using this for the seller onboarding, bringing the employees through and making them comfortable with some visibility in the process. Yeah, helping manage that communication process. And then, as I said, when we get there to sell our company, our platform, we will use that to validate buyer of the platform's assumptions around the acquisition integration.

57:09How far along are we? What are the synergies we've realized? What can they expect to realize going forward in the future? And then, yeah, you got all this energy tracking right there. So that kind of gives you that full picture story. Yeah, I can't tell you how many times we've gone to sell. And after doing 30 acquisitions, we said, okay, now we got to go add this all up again and try to quantify and dig through years old files and approval decks and things like that. So you almost have like a portfolio thinking where you can track all that and everything going on. It's pretty cool. I love hearing this stuff.

57:37We're glad we found it. Actually, the CEO of the company found it on you through a podcast like this that you did. And he listened to about scaling through M &A. Yeah. And disclaimer, it's not a hard push on this, but everybody's got a system that helps support this. And I think it's going to be important with the way AI is evolving. And we're just seeing more and more examples of ways to automate diligence. Yeah. We are interested to see how that can streamline our process, whether that's contract review or some of the more mundane or I'll say expensive things that we pay people to do manually.

58:08that probably won't be that way in the future. Absolutely. So all said and done, I'm truly an advocate of just a buyer-led process. You should control it. Like you just gave examples of sourcing deals and then also examples of really front-loading the integration. So that goes smooth, making sure you got the right team from the beginning, from the executives and acquiring, making sure there's a good culture fit. Those are all things buyer-led. You're lazy on it. You let a banker book dictate how much you're going to bid. You're probably going to screw those things up. That's the view. Look, there's well north of a thousand private equity firms.

58:36So thinking that you're going to wait for a banker to send you and 50 other people a book and achieve some outsized returns doing that, that's a hard game. So we like to play in places where we have less competition, we have an advantage, we found something on a proprietary basis. We sold more than just our money. We've brought a team to help us execute on that strategy. Outside of using the best of many technology in the world, what are the key things you got to get right? And like the first, everybody always refers to the 100-day plan, which I think I'm realizing you keep stretching things out longer than that.

59:05People are just going to have fatigue. And I'm assuming that's why it's defaulted to the 90, 100-day. Yeah, it's a big initial push to try to affect some immediate change. People know there's an end. Like 100 days, we've already done it. Yeah, but it affects the trajectory you're on. If you don't do that, if you don't start getting in there and changing the extent you have to culture and team and setting goals, that can be challenging. There's a few other tools we use. Some executive coaching. Beyond the 100-day plan, there's a one-page strategic plan that we like to use. One-page strategic plan.

59:32It's a dense page, but it captures everything from what are the next months, quarter, year goals, five-year goals, team, culture. What's the big sort of like grand slam vision of what we could become? How do we think about our mission statement, our vision statement? All of that stuff is on there. And again, it's dense, but what's nice is it is all there on one page. We give it to a wide group of the employees so they know where we're going. And you can sit there and look at it. You can pin it up next to your desk and say, hey, are we aligned? And this is something we use at the board level, but the manager team's embraced as well.

1:00:01So you define that North Star with this one-page strategic plan and it's referenceable. Yeah. That sounds like a really key thing. The simplicity and the focus of it. You could say there's a hundred things I got to do, but there's usually three, four, five that if you do those, it's going to drive a lot of your success. It's getting the teams aligned on the priorities, good tool platform in place. You obviously got your deal team to execute, make sure they found the right deal to begin with. And that sounds like pretty good. I don't know if there's any other gotchas. Ultimately, the function's got to deliver as well.

1:00:30Yeah. It's been a repeatable formula for me where we've typically been able to acquire or own the EBITDA for five to six times because we bought relatively small companies. We drove synergies. We drove organic growth. But because we built all that team process infrastructure to allow us to integrate but allow the next owner continue to grow, organically continue to grow through M &A, we've typically sold at 12 to 14 times EBITDA or more. So a doubling of the multiple and that sort of earned arbitrage, as I call it, is something that's a pretty durable model. It's really not dependent on cycles of private equity or asset valuations.

1:01:05It's something you can do through all sorts of different business conditions. We talked a lot about the good stuff, which obviously is a lot of hard work that goes into this. I'm curious about the gotchas. Even when you talk about doing this consolidation, scaling, I'm automatically thinking about the, obviously, a tech guy. I'm thinking about the tech infrastructure. At some point, you're going to need like an enterprise ERP system, things like that. Now you got to start consolidating on it. I feel like there's some overhead of integration that can get expensive. Obviously, we all make mistakes.

1:01:30I've certainly made my share of them, figuring out ways to minimize them and mitigate them when they happen. So one, obviously, the private equity industry is leverage. We use very modest leverage. The pool business, we started with zero leverage. The funeral business, we started with zero leverage. We're leveraging those now as we grow capability and size and scale. Generally, I started in the threes to mid threes times leverage. If you build team and diversity, maybe that goes up into four foreign change. But I've always viewed leverage as something that should enhance the returns, not drive them.

1:01:59If it's driving them, you don't have a good fundamental business-driven value creation strategy. When you say leverage, three on? On the EBITDA. Three multiple of EBITDA. I remember a software guy. We're only thinking revenue these days. Yeah, yeah, yeah. No, relatively conservative so that you've got the ability to weather bad times. You've got plenty of cash from the EBITDA to cover your fixed charges. And I lived through 2008 and 2009 with a levered building products company. We all lived through COVID. Preserving that optionality, coming out the other side will make a huge difference in your overall return.

1:02:29If you get stopped out during that because you didn't have staying power, you get a big negative return. So avoiding that, hiring the best manager team that you can. When you've made a mistake, admit it. Get rid of them early. I can't ever think of a situation where I've heard somebody say, I terminated that person too early. It's always too late. We do absolutely want to be partners with our management team in the long term. We have many repeat partnerships, but they don't all work out. Sometimes people can't scale with the business. Sometimes somebody that's been in a large corporate setting can't come down into a $8,$10 million business where they're a jack of all trades and they got to get their hands dirty.

1:03:01Those are some common lessons. And then again, acquiring without integrating is a disaster waiting to happen. Yep. Why? They're not going to work out. You're not going to be on common systems. You're not going to have a cohesive management team. And once you start having to put out multiple fires a week, month, day, whatever it is, you're not doing anything productive. Yeah, that's right. I got leverage wisely and then fire fast. You got the wrong people. Yeah, hire really well and pay them above market so you get the best people. But when you've made a mistake, recognize it. Act on it. For an early entrepreneur, I've personally struggled with it.

1:03:34And that's a skill to learn is to be objective and know where and how emotions is influencing your decision-making so they can be objective. Is there anything that you've learned from a deal that may have went sideways or just maybe surprises that pop up during diligence or integration? To do a deal, you almost need to fall in love with your own deal, which can be dangerous. You need to remain objective, have other people around you to remain objective. But if you go into something with any hair on the back of your neck that's standing up, any sort of significant question, you don't feel like you've done your work, you've thoroughly answered every question and you feel a high degree of conviction, don't do it.

1:04:13Don't do it. That little thing probably is more real than you think. It'll come back and bite you. And as I said, just like with M &A, if I have the chance in my current platform to do three, four, five deals at any one time and I get one wrong, it's going to keep me from doing multiple other things that are value creating. I know what you're going to say, but I'm still going to ask this. I find those deals. And I don't know if this is me being Indian or raised by immigrant parents, But to me, there's a price on everything. I just, I get that hair raising on the back. I'm just like, all right, maybe I'm not going to pay 20 for this.

1:04:42I'm only going to pay 10. And if they're willing to get a deal at 10, I'll do this deal. I don't know. For some reason, I feel like... So I will do deals with friends where I'm investing a little bit of my own personal money, where I say, hey, if this deal works out, I'm going to make 10 times my money, but there's at least a 25 or 30 or 50 % chance I might lose it all. But that's okay, because that's a personal investment. It doesn't cost me any time. And that's more of an expected value type of calculation. But when you can only do four or five things, and one of those four or five things not only turns out to be a bad deal in itself, but keeps you spending all your time trying to fix that and not doing two things that are value added, that expected value equation is not what you think it is.

1:05:21Maybe I got to rethink my investment thesis and focus more on like bargain hunting. You know, I grew up learning to negotiate at garage sales when I was like 12, 13 years old. So maybe I got to... So the thing I get stuck on a little bit, You push a little hard to get the good deal. Yeah. And then when you look at the bad deal, you're almost like, nobody else wants this. There's often a reason things are a bargain. And you won't do those deals. Generally not. Yeah. See, that's where I knew you could. Look, if you told me I could buy a piece of real estate at a bargain because there was some unusual dislocation and it was made of brick and it wasn't going anywhere, but you're buying a business full of people.

1:05:54This is the true underlying rule. I did this LinkedIn post about how to negotiate like a Patel and it had all these things. And the last one was like, but this doesn't apply with people. If I'm buying a TV from you... We're backers of people. The businesses are all execution-oriented, service-oriented businesses where those people showing up with energy and care about their business. Pride every day is what matters. So in a bargain business, people are probably unhappy and there's attrition. They're breaking that sentiment. Yeah, they're not going to have a positive sentiment and it's going to be really difficult.

1:06:22I learned that the hard way. I was, how old was I? 21. I was doing my first contract gig and I hired these painters. And boy, I felt proud about how I negotiated half of what they're asking. And the next day of the job, I went to the job site, it sure as hell showed. Right. Tim, this has been great. What's the craziest thing you've seen in M &A? One of the things that always amazes me is how quickly things can go from unrecognized to very hot. And I'll give you a couple of examples. I invested in a dermatology platform back in 2016. There were a handful of platforms at the time, maybe six or seven.

1:06:54By the time we exited that business, there were 30 private equity-backed platforms in the space. Wow. Platforms were then trading at higher prices. but we all were competing for the same acquisitions or many of the same acquisitions drove up prices of the platform. So I've seen that in so many sectors. If you look at the home services business and you were to take heating, ventilation, and air conditioning, pest control, tree care, lawn care, painting, there's dozens of platforms in each of those spaces. We've liked a lot of those spaces, but avoided them because the platforms are very expensive and then the add-ons are more expensive.

1:07:27That is one of the things we really liked about the pool platform. It's quite large, about$18 billion in total, very fragmented, very few consolidators, probably five, six, seven right now in the country. Nobody in our geography at this point that we compete directly with. So we very much view this at the earliest innings of that consolidation and trying to find that entry point rather than coming in the seventh and eighth inning when everything's already been bid up. So it always amazes me how quickly people will follow the herd, try to find a platform. But if you're the 30th person buying that platform, you're probably not getting the best one.

1:07:58It's going to be tough. So that segment's going to be competitive and it's going to be tough to execute that thesis. Unless you got a total game changer, maybe. What you're starting to see where they're doing this like tech enable service and they're trying to reconsolidate an old industry. What's the most obscure industry you've ever heard of a consolidation? I was even surprised. Pool installation got me. Funeral homes are getting pretty obscure. Funeral homes is one that I find to be very interesting. I did a diligence on a funeral home years and years ago, a couple of them. They own the real estate.

1:08:27They make profit. You hire a mortician and pay them pretty well. It's a pretty interesting business. It is an interesting business. It's been consolidating for well over 20 years. There's two large strategics out there that are public companies, but they own about 20 % market share. The remaining 80 % is either smaller, primarily private equity-backed platforms, or just massively fragmented 27 ,000 people that own one, two, three, four homes in a region. But it's an interesting business. Our strategies go after rural and secondary markets in Ohio and surrounding states. these companies tend to be fabric of the community.

1:09:00People have gone there for generations. They know people down at the post office, at the local coffee shop, the diner. So there's real kind of brand value and legacy. We keep the brands in place in those companies. We generally own the real estate, yes. So you get the benefit of the mortgage financing. Yeah, you can finance the real estate at very attractive prices. There are people that have done a sale-leaseback model in the funeral home space. That is not one we like. They generally have pretty high operating leverage anyway, which is based on utilization or calls as they call it in the industry.

1:09:29So if you put that additional fixed rent of the sale lease back into it, you've created a much more leveraged operating environment before you've even put any debt on the company. So we have not wanted to do that sale lease back model. It's also much more cumbersome to operate. Let's say you buy five people in a town or a geographic cluster. Most funeral homes aren't busy seven days a week. So there will be an opportunity to improve the utilization of staff, of vehicles. But at some point, if you have seven homes within a half hour drive, you might not need all seven. If you put them into a sell leaseback, you can't close one of them.

1:10:00You can't take that out of the sell leaseback. I've worked on a number of hospitality and I've done some gas station deals. It was really similar. But it's fascinating to have that real estate attached to it because the financing is so much more in your favor. Yeah. When you can have nutrition. And the operating flexibility. Yes. Yeah. So the hard asset element is back in the picture now. Yeah. The funeral business is one I've learned a lot about. I'd say there's very unique customs, which have been fascinating to learn about. based on the ethnicity or the religion of the people that are coming to the home for the service.

1:10:27So that's been very interesting to learn about as well. So interesting. The fascinating thing about living here in this country of a$30 trillion economy and$330 million people, the great thing about my job is we get to learn about fascinating people and businesses every day and hopefully be able to take some of those experiences and apply them across our platforms. I learned a lot from this conversation, Tim. Thank you for taking time from doing deals to have a conversation with me. It's been a pleasure. Sure. Look, we've enjoyed the relationship and your platform's been great for us. We'll be rolling it out to the company we acquired today very soon.

1:10:57I love it. Those of you listening, fellow M &A scientists, we'd love to get feedback. This is the first interview I'd done with an independent sponsor. I want to hear what you thought of it. I know this is a topic that was actually suggested. I'd love to hear what questions I missed or could have asked. Give me the criticism, what I could do to get better at this. If you have topic ideas as well, love to hear it. Until next time, here's to the deal.

1:11:30Thank 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.

1:12:15Again, that's mascience.com. Here's to the deal.

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