287 - Best of 2025! From Wall Street to SMB: Unmasking the PE Roll-Up Playbook and Surviving the "People Tax" with Steve Wiesner

0:00100 million to 500 million dollar transactions is where my focus was. We were dealing with private equity firms that were just managing a handful of billions of dollars. In 95, there were only 16 private equity firms in the world that managed more than a billion dollars. No way. Be ready for the extremes because good days are amazing and the bad days are brutal. How would you be prepared for it? Don't let yourself get too high and don't let yourself get too low. Despite the insanity of entrepreneurship, because it is insane. It's not for everybody.

0:35So Steve Wiesner did about 20 years of investment banking and private equity before getting full time into entrepreneurship. And now I own a company called Watershed Associates, which is a leading negotiations training company. So that is how I make money and spend most of my waking hours. That is awesome. When did you start that business? So I acquired Watershed actually two years ago. Exactly. It was August 29th of 2022. So yeah, two fun years. It's been a blast and lots of great stuff that's been going on. I am a big advocate of smart acquisitions and it made a lot of sense for us to buy this business.

1:15I want to go back a little bit. You've got a ton of experience. You said investment banking, I shouldn't say ETA space, but you bought a business. Walk us through your experience. kind of when did you start in the industry and how did the how did you kind of get to the point where you decided all right I'm actually going to buy a business I'm not I'm no longer going to be on the necessarily investment side I'm going to jump in here so born and raised in Canada came to the U.S. in 1993 went to B school in the states wanted to go to Wall Street for reasons I won't bore you with right now but always wanted to go to Wall Street and that's what I did after I graduated from B school and went to work for an amazing firm that no one today has probably really heard of called Donaldson, Lufkin, and Jenrette.

1:56But at that time, it was a tremendously successful boutique firm that became much more than that. And what really made DLJ was that after Drexel Burnham blew up, which was the junk bond house, a lot of those Drexel bankers came over to DLJ and started our high yield group. So is DLJ an investment bank? DLJ was an investment bank, correct. With a merchant banking operation as well. So we did private equity investing also. Not the group I was involved in, but we did both. Can you just quickly describe like what's the difference between an investment bank and the merchant side like you were talking about?

2:32Think about investment banking as being straight up advisory and that advisory work could be on high yield deals or on mergers and acquisitions or on IPOs, you name it. But you are operating in an advisory capacity. That is what investment banking is. Merchant banking, and I say that with a bit of a grin because that's a bit of a lost art, if that's the right term. Merchant banking used to be investment banks who would also dabble on the principal side, and they would also make investments from a private equity perspective. You have to be mindful of conflicts, but we did merchant banking. We did both investment banking and private equity where we also invested in companies.

3:10Okay. So you started on the advisory side with DLJ and cut your teeth there, got some exposure. How long were you there? I was at DLJ and then we got acquired by Credit Suisse. So I was there for seven years between those two firms. And what was really interesting about DLJ is because we had such a great high yield bond franchise, what that meant was we were kind of one of the first to actually spend a bunch of time with this emerging group of money managers called private equity firms because private equity firms needed to issue high yield debt to acquire the businesses. Right. So very early on, we were dealing, I mean, mid nineties, early nineties to mid nineties, we were dealing with.

3:49these amazing private equity firms that literally at that point in time were just managing a handful of billions of dollars. So I remember putting a slide together back probably in 95, where there were only 16, one, six private equity firms in the world that managed more than a billion dollars. No way. Yeah. Think about that. And now it's a trillion dollar asset class, right yeah so very early on i was i was calling on really big private equity firms because no one else called on them no one else was paying attention to them frankly back then but dlj did so i had a very early look at what private equity looked like in those very early days so on the investment banking side what i didn't realize for a long time and you can correct me if i'm wrong here but investment banking is dealing with large companies right you're giving you're working in an advisor capacity for like these aren't five million dollar smbs these are 50 hundred billion dollar company companies can you talk a little bit about the private equity structure because it's it's an interesting i guess structure that that you have exposure to well so one thing just to clarify as well is back in the early mid 90s we were dealing with significantly smaller companies.

5:08Now that doesn't mean SMBs, right? I mean, these are still companies that were doing 10 million of EBITDA to 25 million of EBITDA, but not every company was a multi billion dollar company by any stretch. Yeah. I ran those together. I meant 50 million, a hundred million, and then I got to billion. I didn't mean 50 hundred billion dollar companies. I just mean, these are like you're saying much larger companies than the typical SMBs. Much larger companies. Exactly. And so in terms of the way private equity is structured, it's fairly straightforward. Frankly, you get a few guys and gals who get together and they decide they're going to start a fund and they go out and they raise money from sometimes friends and family, but typically it's going to be institutional investors of one form or the other.

5:50So they'll go to Cornell and they'll go to family offices and they'll say, we want to raise a billion dollars. And those limited partners will commit capital to that fund. Now they don't just stroke a check and all the money goes directly to the fund. It's called. So when a private equity firm wants to do a deal, they will call capital from those LPs and those LPs are obligated to stroke a check to fund that transaction. and they'll do that. Let's say it's typically like a 10 year life, basically on a private equity fund in general, sort of five to seven year investment period. For the most part, funds are going to acquire a business.

6:23They're going to hold it for, let's say, I'd say the average hold period now is probably around five years, maybe a little longer given what we've gone through the past couple of years. But generally speaking, they want to hold for around five and hopefully sell it for a lot more than what they bought it for. Yeah. And most private equity, at least in my experience, are focused on leverage, right? I mean, you take it from, from the first perspective, you're going and raising money from LPs. Those LPs want to see at least a 15%, let's just say 15 % return annualized on their money. But then they also take that same money and are using it as a down payment and then leveraging debt on top of that down payment.

6:58And so you've kind of have two, two debt classes, if you will, you have the LPs, not really debt, but they get paid out first and then the debt that they're taking on to buy that business. And so there is just an inherent push for 20 % annualized returns, growth, buying good companies and making sure that you're making good investments, which I think private equity has earned sort of that reputation of being ruthless or coming in, cutting costs, et cetera. But that's the structure. That's their incentive. They have to be very profitable in order to get the types of returns that are going to attract the money that allow them to purchase these businesses and grow.

7:32So the reason you saw me smirk a little bit is it's so funny because when I used to run models way back in the day, we would be penciling out a 45 % IRR on these deals. And again, much larger deals. It just shows how inefficient the market was back then. And now you're right. I mean, there's a lot of, a lot of downward pressure, which introduces interesting dynamics, by the way, I don't want to get too wonky, but between the debt and the equity, I mean, it was always interesting when you would see Mez lenders, for instance, who would be penciling at higher returns than equity, which weirdly would actually happen sometimes.

8:05So different people in the capital structure would have different assumptions upon the types of returns that they were looking for. But again, I don't want to get too much into the weeds. I think you're right, though. They clearly leverage as part of what they generally speaking are doing. But I will tell you that, and maybe this is a ZERP phenomenon, given the fact that there's multiples have gotten so stratospherically high. This is one of the big disconnects that I do have about private equity these days with a lot of folks who are very anti-private equity, you are not going to earn a return unless you grow the business almost without exception.

8:40Growth is a radically important driver of return these days. You certainly can't bank upon excessive amounts of leverage in the environment that we find ourselves in today. Debt has gotten very, very costly, obviously. All right. Now's the part of the show where I feel the most uncomfortable, but my therapist says I need to face my fears. So here we are. I've started a newsletter and I want you to subscribe. And what you're going to get every single week are the aggregated conversations from that week that I have on this podcast with an overview of what their business actually looks like. I'm also going to throw in a review of one or two businesses that are listed for sale.

9:12I'll give you my opinion on whether or not the EBITDA multiple is good, or there's customer concentration, or there's red flags or green flags. And then lastly, I'm going to give you one piece of actionable advice every single week on how to buy your first business. So click the link below, subscribe to my newsletter, and let's get back into the show. You certainly can't bank on multiple arbitrage. So that's one thing, and this could dovetail into what we talked about with roll-ups, where you buy a small business, you grow it three times, and then you're going to get a higher multiple on exit than what you purchased it for.

9:42Multiples are also driven by interest rates, meaning there's a negative correlation between interest rates and multiples. So if interest rates are going up, multiples are going down, generally speaking. And so that does take away some of the ease with which you could assume you could buy something for five and sell it for seven or 10 or 12 at some point in the future. So with multiple arbitrage going away, with leverage being harder to come by, the only way you're getting a return is by actually growing the business, which means you have to be investing. You got to be smart. And I think a lot of people still think about slash and burn.

10:15It really does not work that way anymore. So for you, as you were doing this, you're at DLJ. How long did you stay in the investment banking role and when did you transition out? So DLJ was there for, like I said, about seven years. Then I became a, I'm going to, I chuckle only because these are, I'm, it wasn't called this back in the day, but I became a fundless sponsor. So I teamed up with a private equity firm and a family office. This was in 20, trying to think when that would have been probably 2003 timeframe. And for a number of years was out there looking for deals with this family office, a wealthy family and with this private equity firm.

10:54So I went to the buy side. So from the sell side, which is investment banking to the buy side, which is on the sponsor in that case. Can you kind of explain what a fundless sponsor is? Because we have listeners who were, they have no idea what that means. You're like fundless sponsor. Those are, that's an oxymoron. How can you sponsor something if you have no funds? Exactly. So basically I had no money and I was out there. putting myself forward as if I had money because I did have money behind me, but I didn't have the money to stroke checks to buy a hundred million dollar business or whatever it may be.

11:26And so that's effectively what it was. It was somebody who was out there looking for deals who didn't have a committed fund to actually execute that transaction. You find the deal and then you find the money for all intents and purposes. That's a very simplistic way of looking what a fund the sponsor does. It's different than a searcher. I mean, we've had like the self-funded searcher that's kind of come in, but typically a search fund model will be you go raise money and then there's committed, I shouldn't even say committed capital. Basically they have a first right of first refusal to invest in that deal.

11:59But a fundless sponsor is not, I'm assuming you didn't actually raise money to pay for your living expenses while you're searching for that business or did you? No, but I would get paid by the capital sources as well. So yeah, I was covering my nut, so to speak, with fees while I was searching. So there actually were some similarities in terms of the way that that model worked. And similarly, I had the latitude to be able to take a deal somewhere else if my two partners decided that that wasn't something that was of interest to them. So I think that there is a comparison to a searcher, but I was focused on much larger deals.

12:37Again, sort of a hundred million to$500 million transactions is where my, my focus was. Again, great experience. What made you take the jump into just entrepreneurship? Because I'm, I'm assuming you didn't buy a hundred million dollar business and you know, a hundred percent of it. Why the switch? So then I went back and forth. I mean, after that fundless sponsor gig was up and because I went a few years without getting a deal done, I went to the sales side again. So I went back into investment banking, worked with a middle market investment bank, working on smaller deals than DLJ did. So let's say typically a hundred to$250 million deals.

13:13And then I went back, my final stop in finance was another private equity firm out of Seattle called Evergreen Pacific Partners, which is no longer around, but was a pretty well-known firm up in the Pacific Northwest. I always wanted to be an entrepreneur. And I think that that was reflected in many ways. And I was always fascinated with technology. So in 2012, I actually started a software business that I ran for a number of years, again, beyond the scope of today's conversation, but did not end up working out after many, many years of trying. And, but that pivoted me into the training business, which is what took me ultimately to watershed and get this deal done two years ago and so the training business that you have is focused what's your target customer who are you helping in the negotiations generally speaking fortune 100 to 250 companies and 60 to 70 percent of our business is procurement supply chain so we spend a lot of time with procurement teams but we do a lot we work with legal teams we work with sales organizations etc we do work with private equity portfolio companies as well but we tend to work with much larger global companies, which means it's also a very, for a small company, it's a very global business.

14:25So we've delivered in 40 countries on the ground. I spent a lot of time on airplanes, which is fun, but it's also tough when you're as old as I am. I'm not 23 years old anymore. Dude, you have, you have an amazing experience. It's pretty cool. SMB business owner, obviously a failed venture, but you've also got investment banking and private equity. You're working with fortune 100 companies that's just a breadth of of knowledge that i mean i mean frankly most people don't get to or even over the course of their career what is your favorite stage to play in is it the smb is it the you know the venture space do you like the pe corporate like where do you feel the most comfortable what a great question and i've never been asked the question that way before.

15:15I loved all of them in different ways. I hated all of them in different ways, right? All of them are very polar. I mean, some days you love it, some days you hate it, but net net blessed with the experiences that I have had. But I, and I'm not just saying this because I have to, it's true. Today's my favorite day. Doing what I'm doing right now is my favorite day. And I think everything I've done in the past has led me to a position where I can be successful doing what I'm doing right now. And I love the impact of being an SMB. I love the feeling of the winds are just so high. The feelings of losses are so low.

15:54It's still a very extreme up and down, as is the case with an SMB, but it's just an adventure. And from my perspective, that's what life is all about. And I've been very blessed to live an adventure. My career has been very cool. Steve, I'm going to need you to be a little bit less emotionally mature for the rest of our conversation. This is not going to play well. This is not going to play well. I'm just kidding. One thing I'm excited to talk to you about because of your experience is the private equity space, in particular, this thing that gets thrown around, which are roll-ups. And there are a lot of people who own small businesses that know private equity exists.

16:34They've probably lost a deal to private equity. And most of the time, it's probably private equity who want to do a roll-up type strategy. Will you give just a broad overview of what is the private equity roll-up strategy? Roll-ups, buy and build, add-ons, tuck-ins. There's all this terminology that gets thrown around for what's effectively the same thing, which is that a private equity firm goes and buys a platform. So let's say they spend$100 million on a home services business or half a billion dollars on a home services business. And then an important part of their thesis is to go out there and consolidate what is a very fragmented market.

17:19So they buy a large business. They then go and buy a lot of smaller competitors that they will then as add-ons or quote-unquote tuck-ins to their existing platform company. So the platform is the big one and the add-ons will be the ones that they sort of roll up, so to speak, as they progress in their thesis. they're still growing that core business. It's not as if all of the growth is expected to be generated through these add-on acquisitions, these smaller add-on acquisitions, but it's an important part of the thesis. And private equity has been tremendously successful doing these add-on acquisitions.

17:57To say it's a legitimate strategy is a silly understatement. It is a core strategy of private equity, but it isn't without peril. and there's been plenty of very high profile roll-ups that have ended up blowing up costing billions of dollars ultimately so even for the big players it is not without risk so i'll add some this is my own experience dealing with private equity and from what i have seen the multiple arbitrage is a very big component of the roll-up strategy and the way i would describe it as this. If I'm a small business owner or just an entrepreneur and I'm trying to buy a business and it does, let's call it a million dollars in EBITDA.

18:41And it's a little bit small for roll up, but for purposes of illustration, let's just say it's a million dollars in EBITDA and I'm competing against a private equity fund. I'm looking at that million dollars of EBITDA and saying I can pay three to five times, maybe five times EBITDA, five million dollars. That's just the range that those things trade in when you're dealing with a million dollars in EBITDA. The private equity fund though is looking at that and saying, hmm, I'm not just looking at this one that's doing a million dollars in EBITDA. I have a platform and I also have five other million dollar EBITDA businesses that when I package them together, I now get to five million dollars of EBITDA.

19:19And the multiple range there is no longer three to five, it's call it six to eight. So if I can buy them at a lower multiple and sell them at a higher multiple, the delta, the difference is that multiple arbitrage. So they're willing to pay potentially six times earnings and outbid me, the entrepreneur, because it doesn't make sense for me to pay six times earnings. But for them, they can buy it at six times, roll it up together. And it's instantly accretive because now they're combined EBITDA is$6 million and they're trading at a higher multiple range. Is that, did I articulate it correctly? Beautifully.

19:57I think that was very well put, but you've also by intention or otherwise introduced one of the problems that comes with roll-ups is that there is a very strong argument to be made that it can sap purchase price discipline because people sit there and say, well, my platform's worth eight times. So you know what? This thing's really only worth four, but you know what, I'll pay five because I'm still getting three turns of arbitrage. The good players in the market are still very disciplined about purchase price, even though they do have that arbitrage cushion behind them. But it doesn't sometimes for some people, it doesn't still some poor decision or flawed decision.

20:41And to your point, I've seen private equity funds that have gone out and had a thesis and they've said, okay, I'm going to go and roll up X space and they overpay because they've got an over reliance on this multiple arbitrage. And then because they didn't execute operationally, and now we're in a different rate environment, they're trying to divest these, but they can't even divest them for what they purchased them for at this point. Like they have to mark them down because they didn't run them well. Multiples have changed. And the thesis was ultimately dependent upon the multiple arbitrage and not like you were saying the organic growth or or or even the platform growth through the tuck in acquisition so it's it's a high it can be a high risk high reward situation when you're when you're working in a zirp environment and kind of throwing valuations out the window because i will just make up for it in arbitrage when we sell it upstream to one of these other companies that want to you know potentially go public when you also just mentioned something huge with regards to integration and if you look at a lot of the public roll-ups that blew up you know 20 years ago and some very high profile ones and often under the cloud of accounting fraud because you had the finance people trying to cover up the problem and the fundamental problem with the model was in a public company context and i want to avoid getting too wonky here but their stock is their currency right and again i want to do this in a way that's that's i'm not getting too far down a rabbit hole but the point being if your entire business model is predicated upon successfully acquiring smaller companies and one company integration goes sideways and it bogs down the corporate development team or the operations team, et cetera.

22:26And they can now the pipeline of deals slows down. What that means is earnings will slow down because they now can't go and acquire another deal to keep the momentum of earnings growth going. And so what ended up happening with a lot of these big companies is something would clog up the pipe, they would miss earnings. The stock price would fall. The multiple would fall. So to your point, now the arbitrary, the multiple spread is starting to contract. Sellers now didn't want to take the paper, didn't want to take their shares, the stock, because the stock was going down. So now they, another deal wouldn't happen.

23:02And that's where you started this death spiral of a lot of the publicly traded rollups. interesting so it was a really fascinating time but it just shows integration is really hard and you have some very smart private equity people on on twitter on x who appropriately say like you can do it's not impossible you can do really good integrations but it's a lot harder than a lot of those folks a lot of those folks are very gifted at what they do or they have benches of people who are very gifted at what they do for a lot of people integrating acquisitions is very difficult and fraught with peril, change management, people issues.

23:40It's just going to be a lot harder to integrate than a lot of people realize. Yeah. And to me, that's where I've seen a lot of private equity companies struggle is that operational piece. Because you sit there and on a spreadsheet, it's like, well, if I can buy it for this and then sell it for this, there's multiple arbitrage. And all I have to do is eliminate 12%. But when you get boots on the ground, it's hard to get a team to buy into a new owner. It's hard to get them to buy into a new vision. It's hard to get them convinced that, oh, a private equity fund has actually had my best interest at heart.

24:09And they're not just going to come in and cut my benefits. And like, so there is this people tax that you don't, you can't recognize in a spreadsheet and you don't necessarily understand that until you've actually done a couple of these deals and then you can build it into your models and be a little smarter. But I do want to talk about what you said earlier for a role. Before we move along though, cause you just nailed it. Your people tax comment was just so that was beautifully put. I just wanted to share one anecdote that I actually just, you saying that triggered in my mind about the difficulty from a people perspective.

24:42And I think roll-ups in very people-intensive businesses are much harder than, you know, trans time with aerospace components, right? Or like brands scaffolding. Those are, those in a way are better roll-ups than people, really people-heavy businesses. And here's an example of why. I was on a conference call very early on in my private equity days with a business owner of a very sizable industrial services business and one of our operating executives who was going to basically come in and work alongside this company to the extent that we ended up doing this deal. and the guy that we were working with the operating executive had spent 20 years in the industry get on the call and this was the olden days of the conference call as opposed to a zoom it would have been hysterical at the zoom i swear nick within 60 seconds the owner of the business says oh jerry you know it's good to see you again i haven't seen you guys since you screwed up the acme deal boom the gloves dropped immediately an hour-long call was over in like 12 minutes it was insane and so this is the thing when we talk about roll-ups and oh yeah we'll just put this home services company together this one if those people have been competing against each other for 20 years do you think it's just so easy as to snap up the snap two fingers and say hey we're all going to be friends and work under this common plot there's a lot of politics a lot of personality, a lot of things that go into this that can blow up your deals.

26:13It's the same. It's the same way I feel whenever I talk to a searcher or anybody who's like, I want to buy a business and then I'm going to hire an operator to run it. It's the same exact thing because do you know how freaking hard it is to find a good operator? Correct. It's so freaking hard. I worked in healthcare. I managed multiple locations and I had to find administrators to run these locations. It is really, really hard to find talented people who care about the business as much as you do. and to think, I'm just going to buy a business and buy an operator. It just does not work that way.

26:43But it's correct. And I don't even fault them. They just haven't had the experience yet. It's just an immature perspective on things. And I don't mean that in a negative way. They just haven't gained enough experience to understand, oh, it's really hard to do the integration. I wonder if we could go back to just talking about the framework for a roll-up. And you said it as well, tuck-ins, roll-ups, they all kind of have different names that mean the same thing. I do think there is one difference between a private equity rollup and a private company, you know, hold co building, you know, quote unquote.

27:15And to me, it's, it's the expectation returns. If I own a company a hundred percent and I decided I want to grow and I'm going to go through acquisition, I don't need 20, 30 % IRR in order to justify deploying that capital. I may have a different strategy and I just want to go and grow market share. And so, you know, bottom line performance or cash to me isn't necessarily as important. Whereas on the private equity side, I do feel like there is much more of a push on, all right, we need to see returns within this time horizon very quickly. And am I thinking about it correctly? Or is that not necessarily how private equity funds are, are, you know, thinking about it today versus 20 years ago?