[00:00:04] Speaker A: Hello and welcome, everyone. I'm Peter Lehrman, and this is Masters in small Business M and A. This show is an ongoing exploration into the vast and undercover world of small business M and A, where we interview both the proven and the emerging owners, operators, investors, and advisors whose strategies and methods for transaction success have been put to the test. The show aims to surface the nuanced intricacies, the key ingredients, and the important factors that can improve your decision making in your own journey in the world of small business M and A. This podcast is produced by Axial, an online platform that makes it easier for business owners and their M and A advisors to find, research, and privately connect with a diverse mix of professional buyers of small businesses. In addition to learning more about Axial, you can find this podcast, show notes, edited transcripts, and many other related resources, all for free at axial.
[00:01:02] Speaker B: Hey, everybody, this is Peter Lerman. I am your host of Masters in small business M and a. I am really excited to have Michael Arietta join me on the podcast today. Michael, thank you so much for making time for us. This is going to be great.
[00:01:14] Speaker C: Yeah, looking forward to it. It's going to be a good conversation.
[00:01:17] Speaker B: Usually we dive right into deals and deal making and something, but you spent at least ten years in the tech world and then started Garden City. I think that's the right place to start. Tell us how you decided to go from technology. Dell computer. Then you were in software at docusign, and then you make what a lot of people would say is, like, a 90 degree turn into small business acquisitions. Just take us through that a little bit, and then we'll get into Garden City from there.
[00:01:44] Speaker C: I grew up with service companies all around us. My mom worked in the mall her whole life at Victoria secret. And my dad, he was in a furniture store his whole life. And before that, he sold flan on street carts to grocery stores and all that. And so I was always in kind of those callous, like, industries or hourly industries, and I grew a passion for them, or at least a lot of empathy or compassion for them. And so that was kind of my foundation. But then I found myself after college and tech for, as you said, ten years with the last job being docusign. And so when Docusign went public, I really got the opportunity to really think through if money were no object and I could do anything in the world. Do I want to do another docusign, where you go and join another tech startup and figure out your problem, market fit and raise money? And b, two c and b, two b. Hyper growth, or do I actually follow what I'm super passionate about? And my mind always went back to those service like industries. And so I said, well, I'm gonna learn more about that and how cool would it be if I could do what I love?
[00:02:57] Speaker B: Were you thinking about service based industries and a chapter in the service based industry economy while you were at Docusign? Or was it only after Docusign had gone public and you had some breathing room to think about what you wanted to do? How much of Garden City was on your mind when you were at docusign, versus totally after?
[00:03:17] Speaker C: There's a great book I read called Dream Giver. And in the book it says everyone has those childhood little dreams that somehow, some way, they're uniquely put in you when you're young. And then you start growing up and you go through school and you start to forget it, but even then it still circles back around. And so while I was at docusign, I remember living in the marina there in San Francisco, and I remember several of the local companies where we used to do life at, such as a dry cleaner, or there was a little ready meals restaurant and so forth. There was a plant nursery there, and those would always really capture my heart and my attention. And so I would figure out who owns that restaurant, that dry cleaner, that plant nursery. I was talking to that owner, I would say, hey, you should figure out a subscription model, or, hey, you should open up a new location here. Or, hey, you should do a b two b, where you start selling to companies. Or have you thought about different pricing or packaging? Hey, did you have someone that's going to go, and I would just constantly be so passionate about that, yet I would go into docusign and we'd be like, okay, what new feature are we going to add with notary or signing something on your phone or something in Europe? Qualified signature, digital signature, blah, blah, blah. And it was just this thing where I found myself in tech. It was the job everybody coveted, yet my true heart desire was I forgot the name of the little health place. But I spent so many hours talking to those two owners, even went to, like, their kitchen. They made stuff at, helped them think through stuff, buying through used materials that they could find on Craigslist or microwave, all this stuff. And that was my passion. It was my passion that I never acted on.
[00:05:08] Speaker B: Tech was the detour. And service based businesses is something you just came home to as opposed to the other way around. You're home now as opposed to taking a detour.
[00:05:18] Speaker C: And when Docusign went public, and we made some money. We invested in a bunch of deals, just dozens and dozens of direct deals. And I remember I still wasn't even passionate about those. I could ask the good diligence question, be it on the core dev side of docusign, but it didn't get my heartbeat going. It didn't give me that dopamine hit. And I remember there was this investor I met that he and I did a couple tech deals together. I was like, what do you do? And he's like, oh, I'm living in Hawaii right now for half the year. I was like, how does that work? What do you do? He's like, I rolled up a bunch of supercuts, and I'm like, oh, my goodness, tell me more. And he's like, yeah, supercuts and Regis hair salons, you know, they're franchisees. You don't want to build a new one because not a tested market. You want to find ones that are just cash flowing 200 year. You want to put better Yelp, better Google. You want to hire district manager. You want to put okrs in place. I give them 5%. I give a tip to every single hairstylist that hits certain metrics on a whiteboard, and I'm like, this is me. The simplicity of a business model of cash, I loved it. And that was a big conversation for me to be like, I want that.
[00:06:27] Speaker B: Let's move to Garden City. Tell us just what is Garden City? And tell us a bit about just the initial capitalization, capital base of the business, and then we can spend some time on some of the thesis work that you've done and some of the.
[00:06:41] Speaker C: Businesses that you bought going into launching Garden city. There was a couple thoughts in my mind when it came to investors, which I know nothing about. One was, okay, I know the Kleiner sequoia Andreessen Excel because they were all of our shareholders. So I know that venture world, and I don't want that. And then the only other kind of place my mind went was Warren Buffett. And I was like, I love seeing random Wall Street Journal articles on how he buys Dairy Queen or Coca Cola or Amex or Seas candy, etcetera, and how he calls the owners on the phone and says, I'm Warren. I love your product. I'm a big fan. If you ever want to have a partner, we can negotiate it right here on the phone, close it quickly, and he's not looking to sell them. It's just this cash flowing dividend play, in retrospect, not to the t but that's what my mind thought at the time. And just this holds company model. Well, only twelve people. And I was like, I want to create a bench of Berkshire Hathaway meets service master, a place where workers matter. And so that was kind of the thesis. I called one of my mentors, Pat Gelsinger, who's currently the CEO of Intel, and I told Pat, I was like, hey, Pat, I have an idea of, like, buying janitorial companies, construction businesses, accounting firms, whatever, and just buying them for the cash flow. That cash flow would just pay me passive income and I go live in Hawaii. When we own those companies, I could impact the lives of those workers and love them in a way they've never been loved. And Pat said to me, hey, if you do that, I'll give you some capital. And I was like, well, how would that work? I'm just thinking about my own capital. How would that work if you gave me capital? And then that worked with me having to hire an attorney to say, like, how do I take on other people's capital? He's like, well, you're trying to create a fund. I was like, I don't want to fund a one fund, two fund, three different cap tables. You have to manage your management fees, blah, blah, blah. I don't want that. I want one company, I want an operating company, I want a holding company that it just so happens that their operations are that they acquire companies, that's how they grow their own sales, is by acquiring other companies. And I want to have one base of mission aligned value add shareholders, people that care about that. It's not just about profits, but it's about people and purpose. So I want them to be mission aligned. I want them to care, which I'm not going to get from institutional investors. And then on the separate side, I want them to be value add. I want them to say, hey, if I could help introduce you to McDonald's, because that could be a big sales opportunity for this restaurant renovation company. Great. Or if I could open the door to Bush beans or pilot flying j's headquarters so we could clean their headquarters. Great, I can do that. So that was my thesis because I saw work at Docusign. I saw us raise money from the. I'm not going to name the firms, but you could go google them yourself. And they're big venture firms and they gave us capital at the term sheet that we wanted to, but they would desperately throw an operating partner at us to see if that added value. And it really didn't. To us but what really added value was we raised money from people like you, and you were like, oh, dude, if I could get into docusign, I'll add value. I'll open doors. I'll help you meet this person. You could sell an enterprise deal to. Oh, you're looking for a controller. I know a buddy from business school, right? And that was tangible, real value. So that's what I wanted to do at Garden City. So I hired an attorney, started telling some more people, we raised $50 million. And I just said, we're a buy and hold holding company. We use no debt, and you get paid back through annual cash flow that we split with our investors. We're going to buy family owned, founder owned companies that have been around for a couple of decades that throw off strong, free cash flow. And because there's not a bank involved, we could close the deal in 60 days. The owner could roll over as little or as much as he wants. We don't want the management team to go anywhere, because if they made the owner a lot of money, they'll make us a lot of money. So if it ain't broken, don't fix it. If anything, we'll just add people to their team. And then if we could help with our shareholders or a little bit of tech or some more financial controls, we would love to. And that was the model buy and hold, mission. Aligned shareholders that could add value, use no debt. We don't sell these companies. We pay off the cash flow. And so we did that starting in late 2019.
[00:11:05] Speaker B: How long did it take to raise the 50 million?
[00:11:07] Speaker C: Just a couple months.
[00:11:09] Speaker B: Good for you.
[00:11:10] Speaker C: Yeah, probably three or four months.
[00:11:11] Speaker B: That's fast.
[00:11:12] Speaker C: Yeah. Trust goes really, really far. So these are a lot of trust relationships that for a decade, ever since I sold Cutco knives, sold Cutco knives door to door, up where you live, up there in the northeast, in Bergen county, and kept those relationships and then went to Alabama and then kept those relationships and then joined a startup and then kept those, and then started nonprofit and then Dell. And then you just keep building these relationships, and people eventually see that you're a person of character. You're a person of integrity. You're a person of good stewardship. You're someone that works hard, tries to be humble. And when you come around and you have an idea, to your surprise, they're like, I've been waiting for this day. Here's millions of dollars. And you're like, that's really weird. It's not a two in 20 model. They're like, I don't care. I'm backing you because I trust you. So we've never made a cold call in our life. Right now, as you know, we set out to raise, I guess it's the first podcast I've said this in, but we set out to raise $150 million in March or April of this year of 2024. And we raised it really quickly. I don't know where we'll end that, but same thing. I think it's just trusted relationships that doing the right thing when no one's watching.
[00:12:20] Speaker B: Congrats on that, too. That's fantastic. Let's get into Garden City. And there's a ton of cash flowing businesses in this country. Most of the listeners to this podcast are either on the buy side, they're professional intermediaries. I advise on the sale of businesses. Hopefully there's some folks that are working at big companies or big private equity firms, maybe thinking of going out on their own. And then I think also there's some business owners that are thinking about exiting or growing through acquisitions. So it's a diverse audience, but everybody's in the small business acquisitions category in one way or another. How did you start to home in on the services economy? What is the garden City thesis today and how did you get there?
[00:13:01] Speaker C: Yeah, I think when it started, my heartbeat was companies with EBITDA of one to five, family owned, founder, own southeast Focus. Because I lived in Atlanta at the time, I still lived in Florida, but I lived in Atlanta. Selfishly, I wanted to due diligence on companies, revisit and come back home the same day. And there was just a natural bent. Me not knowing so many niche industries, business, industrial business, services, blah blah blah blah blah. Not knowing all of those, my simpleton mind just went to like roofing, pool, construction, h vac landscape. So we just put a lot of effort towards those companies. And that's really been our last five years. We have found ourselves with some acquisitions and investments that we've made. We found ourselves in white collar companies now that are implementers of CRM systems like HubSpot, or they run project management companies that install technology solutions. So now we're in both blue and white collar. So what our thesis is today is we want to acquire family owned, founder owned companies that have been around for a long time that offer primarily b two b nationwide services. That's what we want. B two b nationwide services with at least really 3 million of EBITDA all the way up to eight. So three to 8 million of cash flow family owned companies. And with an emphasis on b two b nationwide. Why b two b nationwide? We own a pool company in South Florida. We love the pool company of South Florida, but it's really hard for us to add tangible, simple, quick value to that pool business in South Florida because of our hundred shareholders across the country. What am I going to do, ask Governor Jeb Bush to go buy a pool from us? It's like, that's the only way we can leverage them. But when we have a company that we bought through your platform of axial called Wothco, they remodel restaurants across the whole country. Well, we can look at Waffle House, Burger King, McDonald's, Taco Bell Sonic, and we could look at all of our shareholders and say, is anyone connected to any of these? And everyone's like, are you kidding me? We're connected to all of them. And so now we open the door to the executive level connection of all that c suite, and now we fill the pipeline. So that's real value that we're like, oh, that's a mode of ours that we've built because of our shareholders we should focus on.
[00:15:26] Speaker B: Does that mean more b two B? Because it seems to me that the pool company, the real issue there in terms of being able to activate the investor base is that they offer a consumer service as opposed to a business service. It's less that they're in Florida, it's more that they don't offer commercial services that create a natural opportunity for you to activate the Garden City investor base.
[00:15:49] Speaker C: It's actually both.
There's some pool companies that only do b two B commercial. Our company does some commercial, too. Let's just say there's one we looked at in Orlando that only did commercial. I mean, what are we going to do? Call the 20 relationships there, only try to figure out how to get into Disney and Wyndham. The list runs out. Versus people are like, man, well, if they did nationwide, we could do this hoa and this discovery property and this blah, blah, blah. It makes the opportunity of business development, strategic connections just a lot tighter. It's better. Yes, it is better than trying to figure out consumers. It's still not as good as nationwide. B two b.
[00:16:29] Speaker B: Do they need to be nationwide at acquisition, or do they just need the capacity to go nationwide?
[00:16:36] Speaker C: We really don't think too highly of ourselves. And so when people ask, can you give us the ability to go nationwide? We're like, ooh, we've never done that one. We don't know if we'll be able to execute that strategy. We know that if you're doing good and you've always done good and you've always made 5 million of EBITDA, we're not going to mess it up. That we know. So they could have the ability to, we would acquire a company that's still b two B regional. It takes away from that quiver, that tool in the toolbox of opening as many connections. We'll still do the deal, though. If they're an aligned buyer, they're still passionate about the company. Strong financials. We understand how the business makes money. Strong management team is not an owner hustle. So we'll still do the deal. Probably.
[00:17:20] Speaker B: Roughly how many investors are part of the Garden City investor base? Is it like 100 or less than 100?
[00:17:26] Speaker C: Close to 100, yeah.
[00:17:27] Speaker B: Okay. I'd love to just maybe hear the details a little bit on how this happens. You buy a company, it's got an ability to do nationwide services. It already has that capability.
How do you operationalize the, the investor base in a productive way? Who are the point people? Just how do you get it out of the blocks and make it really systematic and mechanical?
[00:17:47] Speaker C: That's the magic. I mean, that's the magic right there.
[00:17:51] Speaker B: Do you want to share the magic or you want to keep the magic? Magic, yeah.
[00:17:55] Speaker C: It doesn't matter how many people you tell it. No one does it. It infuriates me. It's like in Silicon Valley. Our CEO that I learned this from, he said we align our corporate go to marketing strategy with our financing capital raise strategy. He told everybody, he told every company that he was on the board of investor of at benchmark. No one does it because it's so much easier to raise capital from institutional investors. So much easier. If you want to go and raise $30 million, you're like, oh, my gosh, we raised 30 million for this. Congratulations, you did it. But it's so much more fruitful if you can engage a base of people. So first and foremost is we are aligned. If you ain't aligned, you're not getting into Garden City, end of story. I very proudly tell people, if you're just looking to make a good return, the lower middle market, which we will make, you're not going to get it. You don't care about people. Or if you have a fancy family office that you have your fancy CIO and they're reaching out and they're trying to get, it's not going to happen. The principal is not interested in Garden City. They're not going to invest. Anyone you see on our website and all those fancy names of athletes or celebrities or CEO's, every one of them. It's that person. And their wives. Their wives as well. It's not a he thing, it's a we thing. And I'm not trying to hit any whatever statements, but what I'm trying to say, it's a marriage thing. When a husband invests in an investment, typically it's always he's doing the investments. I didn't want to do that. I said, this is a thing that I want both of you to feel as though you were involved. So it's a we thing, not a he thing or a me thing. That's kind of the foundation of it. And then from there, it's being very, very clear about what we're not. So a lot of people say, hey, so to be clear, are you saying that for us to invest, we have to be willing to go to the shareholder summits gathering every year that I'm anal about, or that we have to be willing to join certain prayer calls that we do every single quarter, or do we have to be willing to go ahead and open doors if you needed to? I'm like, I can't mandate any of that, but if you're not interested in any of that, I would not invest if I were you. And so when you try to be everything for everyone, you're nothing to no one. And so we just try to find our little tribe. That's it. And so when we have that tribe, the things we do is we communicate a lot. Clarity is kindness. I say that all the time. So we try to be very, very clear of what we're doing. We do. An annual shareholder summit last year was 90% attendance of our shareholders. Almost everyone brought their spouses. We come together for two or three days. We do it every year. So it's really special. Really, really special. We only talk about garden city for about 2 hours. That's it. 2 hours of a two and a half day summit. So all of our other shareholders speak about content, a wide array of whatever this year will be. AI, raising kids in the digital generation, blah, blah, blah, blah, blah. Right? Marriage. We're gonna have amazing performers. So we wanna create a community of people that are like minded, investing together, doing life together, making impact together. We get together quarterly and we just pray for all of our companies, and we just pray for the people going through hardship. We have a lot of employees, some people have cancer, some people, people have died in their families. There's a lot of tragedy in this world that we see. So we just wanna say we care for you and we just pray for goodness for you in your life. And so we do that as a family. And we're very systematic. So with all of our companies, once a quarter in our board meetings, we just say, who are your top targets? And then we have a great clean CRM. Okay, Peter, you're a shareholder, for example. I know that you invested, I won't say what company I know that you invested in, but you invested XYZ apparel company. That apparel company could be a great customer of ours. I know to reach out to Peter.
[00:21:41] Speaker B: That'S once a quarter.
[00:21:43] Speaker C: Yeah, once a quarter. We connect those dots. Our CEO's and our chief revenue officers or head of sales. Draft me the emails. Copy that email. I sent it to you, Peter. Peter introduced me to CEO of that apparel company.
[00:21:55] Speaker B: That sounds like something you could do continuously, not even like quarterly. You could just do that for all the companies ad hoc throughout the year. They just put together their target list. The CRO and the CEO put together the target list. They call Michael and say, michael, this is who we're going after. And then you can connect the dots.
[00:22:14] Speaker C: It's all sad. Sad systems, accountability and discipline. So we did that ad hoc and it was a disaster. And then what I had to realize is it's just got to be sad. You got to have a system that says, here's a spreadsheet. You put in your top ten people. We put, who's going to be held accountable? Tommy's accountable for these names. And then it's a discipline of always coming together in a systematic routine. Once you start doing that for a while, then it becomes second nature. And now in some companies, it could be more ad hoc, you know, but especially when you just take them on, you just got to have that system, accountability and discipline.
[00:22:53] Speaker B: One of the things in our prep call that I had mentioned to you is just this idea of what is Garden City getting better at since 2019? Where have you gotten better? What has surprised you? What has been easier? What has been harder than you thought? What has been the progress of Garden City, not the companies that you've bought, but the progress of the garden City company over the first five years. What are the big rocks you've moved?
[00:23:18] Speaker C: One of my best friends is a guy that runs another very identical thesis, Brent B. Shore, as you know. And we speak to each other almost daily, and we're like, dude, how brutal is the lower middle market? It's just so brutal, so messy. It's so difficult. It's like eating glass every day. Constant, constant things held on by. I wish duct tape more like scotch tape. And so what I've learned is that there is a huge reason why I get an email once every day from someone wanting to start a lower middle market fund. And then I look in the rearview mirror and like, no one's done it or no one's still doing it, or no one was able to get it off the ground, or no one found a business, or no one raised capital. So the things that have been easy for us is deal flow has been easy for us, and raising money has been easy for us. The part that's been brutally hard has been, how do you structure deals? That makes it a win win for all involved, and you don't allow structures to be a shackle. The other thing I've learned that's brutally hard is that when you're young and we have not had a lot of annual management fees, it's really hard operating several companies with a team of five or six. Everyone's wearing multiple hats, and people just become fatigued and exhausted, and you just desperately need more people to help. So thank God that we've raised this new capital raise and now we have more management fees to pay people market comp a, because no one's been making market comp and b, be able to hire more people. So I've learned it's brutally hard. I'm having a smaller team. We've learned that bigger is better. We've learned that companies that make 1 million of EBITDA, something goes wrong and you freak out that you could be at breakeven at the end of the year. We've learned that bigger is better because there's more margin for error, there's more cash flow to invest in a management team. A difference between a $1 million and $2 million EBITDA company is that it's 100 times bigger. It's twice as big. It's 100% bigger. It's twice as big. And there's a huge difference in this. We've learned bigger is better. We've learned that we've had some people come and go internally on our operating partner role. I had to try different roles to realize, okay, don't get creative. I tried getting creative with the roles. And at the end of the day, some things that private equity has done works. Hire someone that's been a multiple CEO for multiple times, that knows that I come across other CEO's to help them really be a coach and a chairman in a box that works.
[00:25:58] Speaker B: What were your creative ideas?
[00:26:00] Speaker C: Let's get an amazing, gifted military special operations force officer who has led hundreds of men's in critical scenarios, knows how to empower people and knows how to hold them accountable. What about that does not sound right? It's amazing. But then when you're in it and you're in a board meeting and the owner that grew a company to $7 million of EBITDA, like, I have no clue how to forecast for 2025. We're in 2024. I don't even know how to set up a dashboard margins forecast, how to set up a comp sales plan. 1089 w two. I have no clue. And then he looks at the special forces guy. The special forces guys like, neither do I. I want to empower you and hold you accountable. And then I'm over here in the room being like, okay, what we really need is someone that has gone there and done it before for that private equity operating partner role. Makes all the sense in the world. So I've had to learn that the hard way.
[00:26:57] Speaker B: Anything in terms of thesis development over the course of that time, or do you think the primary change has just been really homing in on this nationwide capability?
[00:27:07] Speaker C: Great question. There are thesis. Something we love, and I won't give any of our secrets. Something we love is. I mean, everyone loves this little niche industries that if the big boys find out about it overnight, they start doubling their EBITDA multiple. We used to own, I could say used to. We used to own a company that we sold out of the portfolio. Our intentions to buy and hold, but for all the right reasons, we had to sell out of this company. We got into this industry that no one really knew about. Some of the big boys got in, they started buying some of the bigger players. It starts showing up in GF data and all the online articles of what the EBITDA multiples are. All the lower middle market, smaller funds say that's a great industry. It's 40% gross margin, it's 20% net. It's reoccurring revenue. It's b two b. It's noncyclical. How do we not see it? We bought it at four and a half times. They now start trading at six and a half, seven and a half times. So what we wake up and do every day is what are those little boutique niche industries that not a lot of people know about, that are solid industries that have just not been traded up just for the heck of it? H Vac, as you remember, air conditioning company that, by the way, is not truly reoccurring contracted revenue. Just for the record, service contracts is, you know I have a house. My dear buddy owns the HR company here in Jupiter. I have a service agreement with him. If for any reason tomorrow I don't want him, I text him and say I'm out of. It's not real reoccurring revenue for the record. It's service, it's one time, it's not contractual. So anyways, those companies that replace the simplest, simplest H vac system, it's so easy, used to trade for four or five times, which is honestly fair. And then all of a sudden you get tribes that sells their platform for 20 times, 18 times, something astronomical that then now because of leverage and financial engineering and creative baskets and all this stuff, people think they're worth ten to twelve times and so now they're going down again to seven times. So we don't want to play in that crazy world. We want to find good buyers and say, yeah, my business is worth five times, six times and that's what I'm going to buy for. So we're constantly looking at healthcare. We look at thesis like hey, there's a bunch of aging demographics out there called the baby boomers. The silver tsunami that axial so good at. Great platform that people go to to list those baby boomer like businesses. People like me go there and buy those companies. Well that same demographic is spending a lot of money through healthcare. I'm on a big healthcare board. I love finding little niche healthcare industries that are serving baby boomers. That's all that I'll leave it at. And there's little weird niche pockets in there that nobody knows about. And I'm like, this is such a good industry and they trade for what I call fair multiples. They can make a good exit and we can make a good return.
[00:30:16] Speaker B: That's great. We'll leave it there. Some great clues. Could you talk a little bit about you mentioned the benefit of having some more capital, the ability to recruit some more people to Garden City. Could you talk about why do you get so resource constrained? Why isn't there more leverage and more scale to the holding company in those early innings? Aren't you just buying companies and letting good managers run companies? What is so people intensive that has you so excited about having raised additional capital and the ability to grow your team? What are people getting wrong there? They're like Warren Buffett. He's in Omaha all by himself, puts his feet on the desk and drinks the cherry Coke and reads ten ks all day. He has no staff, barely has an EA. Here you are saying like, thank God we raised a couple more bucks so that we can hire more people, get into the people intensity of holding companies for us.
[00:31:08] Speaker C: What the heck is Warren Buffett going to do at Coca Cola? And then it's like, well, I don't know, Coca Cola has like a zillion evps chief everything officers. So it's a financial transaction. And he's a very smart guy that knows I'm not going to try to justify my worth of by building out a team, but now comes alongside and starts breathing down their throat and tries to look for cost cutting, all that. So he's all about enablement and empowerment in the lower middle market, where we become so capital constrained is our issue as well. On our success has become our detriment. What I mean by that is in a very short period of time, we've built a pretty cool brand, at least in the southeast. At least in the southeast where we have a lot of drip campaigns. And I've done a bunch of podcasts and we go to a lot of conferences and we have shareholders and we do a lot of dinners and all of that. And so that creates a lot of deal flow. When that creates a lot of deal flow, how do you screen through so many investment banking sims that come to you? And how do you screen through so many proprietary deals that people refer to? And so how do you quite literally almost 1000 a year already in five years of existence. That's where we're at. That's hard. And you have people on our deal team being like, what do you want me to do? I can't go through my inbox and probably look at a deal and go out, fly out there and visit their team and figure out how they actually make money and figure out if their management team is going to roll or not while not shutting off our deal flow engine. And I'm like, well, we can't go hire another one or two BD associates. So I don't know, then if you have a deal that's happening, as you know, that's diligent in three things. Is what they told me true? What is it they haven't told me? And what is it that this business owner doesn't even know about his own business? And so that just requires all hands on board. And then when you start having companies, it's constant problems. Constant, constant problems. And the business owners have been really lonely for a long time, and now they see that they have a partner and so they want to lean on us, which is a good thing, a really good thing. But we have a person that, she's a full time recruiter, an internal recruiter. And so all the companies we buy, they're so short staffed because the business owner has been frugal on his cash flow. So she's up to her head on sourcing a bunch of people and staffing those people. And then we have someone in ops that his whole responsibility is helping with strategic projects. So he's figuring out, man, how do I roll out procore, a full ERP system? How do I roll out Salesforce, the pool company, how do I roll out this and the implementation company, how do I do pricing and margin? Because all of these quote unquote strategic projects, these SMBs, they don't have those resources. Everyone's just trying to do the thing that they do. They don't have a resource to say we're going to go and redo our website or going to go and deploy ERP. So that's what I mean is I don't think it's a lot of people that you need, but it's sure more than what we have.
[00:34:08] Speaker B: All these businesses, to your point and to the core of your thesis, they've been cash flowing businesses for decades. They didn't have a recruiter, they didn't have Salesforce, they didn't have an ERP. And then you put all of this trouble on yourself to say, oh, we're going to do all these things. Then you've got people intensity and then you have this huge stream of work inside all of these organizations either on a singular or distributed basis. What have you learned about the ROI on doing all of these things and saying, we're going to quote unquote, professionalize these businesses that we buy. Where are you on that? There's a narrative in private equity. That's what we do. We come in, we professionalize. Which of those projects five years in are you like, these matter. They really help. And which ones are you like, oh my gosh, those are the biggest red herring. Don't ever waste your time doing those things. They're a huge pain in the ass. They're expensive. The ends don't justify the means.
[00:35:04] Speaker C: So many projects we've learned that until key one off site of our team this year where we did anonymous feedback from our CEO's and what they said is the stuff that mattered is two things and two things only. Sales introductions and helping us staff amazing people. That's it. And we're like, whoa, whoa, whoa. We deployed an amazing payroll system. You were on paper checks before, they were like, and we should still be on paper checks for how long that took us and the dysfunction and blah, blah, blah. And we're like, whoa, whoa, whoa. We went ahead and now we do monthly town halls, and they're like, and it still doesn't change all the complaints that we have. The list goes on and on of what we did that we were so proud of telling our shareholders to what they said actually mattered. So what we say is really the three things that we really do is sales introductions. We can help with that. And that sales, sales, sales and small business changes everything. Two is people. The biggest impact you could have is a business that you acquire, that you look at the leadership team and you know how much stronger it would be with the CFO or with a head of sales or with etc. Etcetera. And they don't want to do it. When we do it, everyone says, how do we get here without these people? How do we get this far? So those are the two areas. The third one is just mission critical projects that they know they've been needing to do. They just don't know where to start. And we make them fight for those. Now, we're not the ones suggesting those. It's those people saying, we have a whiteboard that does all of our job tracking. We cannot do this. We're in 2024. We have people on the road. And one of our companies, I won't mention them by name, they have a camera in their conference room to show their whiteboard so they can see the job board. They're like, hey, we know we need something. We can see the jobs on our phones. We just don't even know what system that's called, how to deploy it. Nothing. So we're like, if you really want to see, we'll do that. So everything else, like something we learned, Peter, that we'll never do again. We come in, we change the payroll, change the banking, we change the insurance. Stupid, stupid, stupid. We're like, hey, well, it's better insurance. Hey, it's better 401. You get a little long term disability. And what we've learned from all of our surveys is, please don't change it again. Let us be. It's already changed. Seeing new faces and taking new calls, now you're making us do this big lesson learned.
[00:37:35] Speaker B: Garden City is a people first holding company. It's a descriptor of your company. It's clearly in there. It's on your webpage. It's in there about us. If you google Garden City, you'll see it come up again and again and again. And as I was saying to you in that call, there's no holding company. That's like, hey, we're a people second or we're a people last holding company. And so nobody takes the other side of this position. Everybody in one way or another would maybe say they are people first. But you've decided to incorporate it into how you talk about the company again and again and again. So I wanted to cover that a little bit. Just how does it manifest at Garden City? You shared a little bit of how you're different with LP's, how you gather lP's, the kind of LP's you want. You're not interested in CIO's, you want the true wealth owner involved and excited. What about on the operating company side? What does people first mean? What are some of the specific examples of it? I know you have this idea of three f. I think it'd be great to get into this if the long.
[00:38:35] Speaker C: Term vision is, I really hope this happens someday. I hope I walk onto an airplane and I see someone wearing a polo or t shirt or hat that says one of our company's names on it. And I sit next to that person and I'm like, tell me about that company on your shirt. Where do you work? And they look at me and they say, like, you have no clue. You have no clue. I work at a company where my life has been enriched by being a team member, not an employee, but a team member of this company. And they have enriched me wholly. And I'm like, how in the world? Like, you don't hear that? Tell me about it. He's like, well, they have this three f program, and it's about strengthening our faith, strengthening our finances and strengthening our families. And that's what we do. That's the vision. And so we look at it of saying, hey, if we could strengthen people's faith, that they just don't lose hope, they don't lose joy, they don't lose perspective, they're thankful, grateful.
What can we do there? As I mentioned, with all of our shareholders, once a quarter we have a prayer call. The people could submit prayer requests, whatever they want. It could be anonymous or named. Almost 90% of people, a recent research report show 90% of people are open and receptive towards prayer. So we're not trying to jam anything down anyone's throat. But it's like, you tell me, I bet you a $100 when your daughter got sick or son got sick or wife got sick or dad got sick or whomever, when someone says, like, hey, I'll pray for you, or you might even ask, just say a prayer for us. It matters. It matters. You want hope, as employers to see Drew Brees and Tim Tebow and Derek Carr and Cole McCoy and Mike Fisher and Governor Bush and all these people on a prayer call, praying by name or anonymously for people, it matters. So we do that. The second thing that we do on the faith bucket is we give resources. A lot of our employees are on the road in their jobs, and there's a great app called pray.com dot. We give them free
[email protected]. and there's things on there about marriage, about raising kids, parenting, hope, anxiety, mental health, all that. We want that to be a resource. They're really known for bedtime prayer stories. People are really anxious at night. Almost 70% of people are anxious have problems sleeping in these day and age. So we want them to have peace at night when they go to sleep. So we give them that resource, the last resource we give to them and their family right now, media, and it's just over 10,000 videos on same thing, savings and marital conflict and children and parenting and all that. We want to strengthen your faith. The second bucket is family. And we say, hey there, marriage is hard. Marriage is a blessing, but boy, is it hard. No one can disagree with that. And so we want to come alongside you in that. So a couple times a year, we pay for you to have marital counseling. It's good. It's not a negative thing. It's confidential, and it's a tune up. Everyone needs it. It's a tune up. And so we want to pray for that. So that the janitor or the guy that's up on the roof fixing the roof systems or whomever could say, hey, we're going through a difficult time. I'm hopeless. I don't know where to go. But I have this resource. It's going to cost us a couple hundred bucks. Our company's going to pay for it. The other thing on family is for anyone that has any babies, we pay and give them diapers for an entire year for free. And we do that through a great company that even when they get diapers, there's actually an impact that now kids in need get diapers for free. And so they love that. We're just saying, like, we want you to know that we're with you in this. We want to support that. That's an expense. It gets more expensive every year. And so we want to be with you in that. And then lastly, on finances, we do two things. We want people to get out of debt and learn how to save. And over 10 million Americans have graduated through this thing called Dave Ramsey Financial Peace. Financial peace is a university that costs about $100 to go through. They give you a tool budgeting app if you graduate that we seed you with $200. So we pay for the class, and not only do we pay for the class, but we cede you to actually have some money in your account to say, job well done. We want them to get out of debt and learn how to save and be good stewards for their family. Then lastly, we have an internal emergency fund. It's a mercy fund. And we say, hey, we know things come up. You go to work, you have a flat tire, battery's dead, you lost your keys, you go to the ER, and you weren't expecting that big bill of your deductible. Every year you get up to dollar 200 towards you for the internal emergency fund. And so you don't have to worry about that being a roadblock of you getting to work. So that's what we do. We want to do a lot more, Peter. Like KKR, they make all their employees owners. That's on our roadmap that we're starting to pilot with the company that we want to say whenever we pay ourselves out, we pay you out. If we want you to think like an owner, we want to make you an owner. So we're not there yet, but we hope we get there.
[00:43:39] Speaker B: You want to get to a place where everybody is getting a distribution when Garden City is.
[00:43:44] Speaker C: Yep.
[00:43:44] Speaker B: You believe that that's an impactful approach?
[00:43:47] Speaker C: You find me one study that shows that that's not the case. Everything shows it.
[00:43:50] Speaker B: Is everybody as an owner or as just a profit sharing?
[00:43:54] Speaker C: You nailed it. No, data does not show owner changes behavior. It shows incentivizing behaviors to compensation through aligning them to the p and l does. So we spent a lot of time on this. And one of our company values is seek simplicity. And I wish we would have done that. Of all the hours we spent of chasing employee ownership, there's so many model phantom equity. No, we're going to give them incentive equity. No, it's going to make profit shares. No, it's going to be a different class of shares. And when you go to someone like my mom and dad and you say, congratulations, here is a paper, and on this paper you own equity, they go, this means nothing. My h vac system just went out, cost $7,000 I don't know what to do. This means nothing to me. But when you tell them, hey, you, based on your tenure, based on your input, and based on your role, if we make xr this year, this gives you an additional $600 or $6,000 that changes behavior. They start looking at their job saying, do you know what? I bet you if I choose this different route or if I get gas at this place, that's going to save us money, that's actually going to help me. Maybe instead of make $600 this year extra, it might be 625. And they start to actually think the.
[00:45:09] Speaker B: Behaviors like an owner, I'm sure there's complexity there that they start to, like, make certain decisions that maybe drive profits, but maybe, maybe degrade quality, and they don't do it on purpose. Horrifying case in point, most recently in the press, is Boeing.
They're making planes so quickly that, you know the doors flying off the side of them when they're in the air or laughing, but it's just not funny. I mean, I would be so afraid if I had been on that plane with my children and my wife. So have you thought through some of the unintended consequences of profit sharing yet? Or is that why you're going slowly on it?
[00:45:44] Speaker C: We're going slowly on it because first we want to get the three f's right. We really want to get that right. We want to concrete that. We call it phase one, two, and three. And that's phase three. Phase two is more of an involvement of our shareholders in the community and so forth. And that's a big step. It's a big move that we really want to get right. So we don't know enough about it yet. All we know is to be a people first holding company. I think that's the end goal. I mean, there's a lot, a lot of research, especially out of HBS and other places, that just show the results of the ROI, the IRR, the MOIC, companies that do this. And it's. I mean, look at ownership works of Pete Savros and KKR. It's astonishing. It just works. So I'm not sure if it's going to degrade quality to increase output and profitability. Maybe we put another metric like NP's to measure that. Something like that.
[00:46:37] Speaker B: Do you want to talk about Wothco at all? I know that's the one that we talked about. Obviously, you sourced it on axial. Is that a cool case study in any way? How would you grade yourself on the three f's? With Wotka, because I'm curious how these things are all excellent ideas. How well are you getting them activated? How many people are remembering to take advantage of the three fs? And with Wothko or anybody else, it'd be interesting just to hear about it in action at a company of yours.
[00:47:02] Speaker C: Yeah, Wotco is one of our newest acquisitions of about a year ago. And so the first year, we try to just do as little as possible and just learn. So we're just in the early innings. But Wotco is such a great case study of a deal that we obviously acquired through your platform. It just shows you that a lot of times when you dig and you have an open willingness to see what's out there, an amazing opportunity lies. So we found it through axial. There was a great investment banker out there from North Point Advisors, a guy named JT Stroder that's now a dear, dear, dear friend of ours. We found a deal that they renovate restaurant. They've been around for many, many years. They don't build new restaurants. They convert a remodel restaurant, an amazing track record, strong profitability, and a great, amazing leader. So we met that leader. We knew that we hit it off. He was in Atlanta. We were in Atlanta, and we simply told him that he could roll over as little or as much as he wants. We wanted him to roll over as much as possible because we believed in him, that he still had a lot of juice in the tank and that he knew what to do and that we wanted him to shotgun alongside us. And he did. We kept the structure very, very simple, and we delivered on everything that we promised him. And so thanks. I mean, if you guys did not exist, we would have never gone on the platform. We would have never found the deal. And now we have a great platform with an amazing leader who's also now an investor of ours that's still leading the company. We brought on a COO. We brought on a controller. So same exact playbook. We rolled out an ERP system of procore. We opened a lot of strategic connections of restaurants. And now JT and us are friends. We're thinking about each other for deals now, support each other, and so forth. So it's been a wonderful case study for us that we found through exit.
[00:48:55] Speaker B: It sounds like the LP basis or the investor base is really activated and has some really cool reach. And some of that is a function of. Well, I guess a lot of that is a function of just the orbit that you built around yourself, all the trusted relationships you mentioned early on in this conversation, and now that's really active and spinning hard for you. You said that that's created real overflow issues. In terms of deal flow, what's Michael Arietta's point of view today? The proprietary channel, the intermediated channel.
[00:49:26] Speaker C: You gotta do it all.
[00:49:27] Speaker B: How do you triage when a business development associate of yours says, where should I go? How do you help them triage? What frameworks do you use to think about what to pursue and what not to pursue? Like, what's the prioritization, thinking around deal flow, at least at this point in.
[00:49:42] Speaker C: Time, you have to do it all. And there's people that are like, oh, I'm never gonna work with an intermediary. I'll never go find a deal on a platform like X. So it's only proprietary. It's like, okay, good for you. We found one of our best portfolio companies on X, and it's been a grand slam for all of us. And so you have to. You have to do it all. And the number one thing we looked for is owners who truly care what happens next. And my friend Brent taught me that in your model, and in my model at Garden City, the only deals we're going to do are for owners who truly care what happens to their business over the next many years. And so that could be a proprietary deal. But many times we get a ton of proprietary deals. I mean, five of our seven acquisitions have been proprietary. And you'll meet a guy or a gal or whatever that says. Like, yeah, your offer is way too low. I'd rather go partner with someone else. And they're going to put a couple turns of leverage on it, and they're going to flip it. And I'm going to get a second bite of the apple. I'm like, that's great. You don't care what happens next. You care about what happens next for yourself. You don't care about your clients, your customers, your team members, or your community. And that's fine, but we're not your right buyer. And so for us, we need to turn over every rock financial advisors, axial, investment bankers, intermediaries, proprietary lawyers to look for business owners who truly want to partner with someone. They could roll over equity. They don't have to worry about a bunch of debt, and that there's no mandate to flip it.
[00:51:10] Speaker B: Zero leverage for you on every deal, maybe it changes.
[00:51:13] Speaker C: So far, we've never used leverage. So far. Zero leverage. Some leverage is healthy for many reasons. It puts good disciplines in place for the management team that have to be there for the lender. Obviously there's good tax benefit. I mean, it obviously juices up returns, but so far, zero leverage.
[00:51:30] Speaker B: What would make you use a tiny bit of leverage?
[00:51:33] Speaker C: Sounds like we're about to. With interest rates that look like the Fed's gonna have to start dropping it to juice up the economy. So we probably will. If debts free again and still keep an healthy amount, I think realistically we'll start to put one turn of leverage on it. The other thing we do is you could always put leverage on it later and see how cash flow is actually converting. We could always do a dividend recap. So, like, right now, we're eight figures of EBITDA across our couple handful of companies that we own. And we could always go to a bank at the hold code layer, put a turn and a half, two turns of leverage. And that's extremely conservative. Now that we've owned these companies and experienced the working capital and cash flow and the capex and everything. I've never heard of a business getting into trouble for not having any leverage.
[00:52:19] Speaker B: No, that's for sure. It's definitely a returns generator and then a tax shield, but you can do perfectly fine without it. Does Brent be sure of permanent cerage ever? I don't think he uses much leverage ever at all.
[00:52:31] Speaker C: I know it's minimum to none, so if he does, I'm sure it's very, very minimum as well. They're like our sister friends. I think it's just the two of us right now, that they're obviously much bigger than us. But, yeah, they've been just tremendous, tremendous partners. Tremendous.
[00:52:46] Speaker B: That's really cool that you guys have been partners, given that there's some amount of overlap.
[00:52:50] Speaker C: Ton of overlap.
[00:52:51] Speaker B: I know we're on the record here. I love your off the record point of view on competition. And what is the partnership? Why are you guys partners? Why aren't you guys competitors? What makes this so positive? Some. Can you just lay it out? I believe it, but I just want to hear you lay it out.
[00:53:04] Speaker C: Yeah. Look, I think that this is a real, real, real thing in private equity, where there is an appetite for competition, and there's an appetite to take the other guy out, and only one person will survive. And I think the beautiful part of, specifically of Brent is that when I had the idea of starting Garden city, I came across his model, and I fell in love with it. Basically a holdco. They have funds. It's 27 year fund lives, which actually, we're the same now. We changed it to his model so we have a 27 year fun life, which is a holdco. So hold company, buy and hold, minimal to no debt, do no harm. Simple businesses understand the business model. There's a mo. And so when I reached out to him, all credit to him, he said, hey, I'm for you. I want you to win. What is ours is yours, and there's nothing that is off limits to you. And he meant it. And that's a friendship that has been built and developed, and we would not be here today if it was not for his support. Zero, zero chance. And so we don't view it as competition at all. We view it as, what's the opposite of competition?
[00:54:17] Speaker B: I forget the word alignment or, I don't know. Collaboration. Cooperation.
[00:54:21] Speaker C: Cooperation. That's it. And we view it as a collaboration where we've even competed on a deal together. We didn't know until afterwards. And he high fived us and he praised us, and he even supported us in that deal. I really hope that Brent and I could be a light in the space to show how two of the identical models could actually be strengthened to one another. We're iron sharpening ironization, and they're both winning together. This market's so big, there's hundreds of thousands of deals out there. You're very rarely going to come across each other, ever. And so for us, when we do come across each other, it's may the best man win. But we're going to do it in a way that we are completely honoring to one another, to the point that we tell the business owner, like, man, if I was you, I would go with him because he's amazing. And then he's saying, if I was you, I would go with them. They're amazing. We have some nuances that are pretty different. We're smaller. Our perfect size is that three, five, 6 million of EBITda. He's probably now in that five to ten to 12 million of EBITDA. So there are some differences, but at the end of the day, I just really hope that people that are starting funds or managing funds could find the partnership that we have to really help each other out, because it's lonely, especially when you're trying to figure out carry and operating agreements and non competes and all these things. We would not be where we were without them.
[00:55:36] Speaker B: I was going to maybe close because we're coming up on time here with actually a little bit of a question or two on just your advice for the next cohort of people. Starting holding companies or investment firms in this part of the market. What is one thing that you did that you would definitely recommend that they do? And what is one thing that you did that you would definitely recommend that they not repeat? What's one thing to do and maybe what's one thing you would, with the benefit of hard lessons learned, steer them to the side of?
[00:56:11] Speaker C: One thing I would definitely do is I did an insane amount of research.
So while I was at docusign, I read every single paper, I think out there on search funds, lower middle market, deal flow, intermediaries, deal structures, raising capital, fund structures, LP GP manager, member operating model, diligence, service providers, fund admin, blah blah blah blah blah. And I did not leave my job. Sarah Blakely has a great quote, I forgot what it is, but she basically says don't leave your job until the other thing is a sure thing. And that really hit home to me where I said I'm not going to go and leave docusign until I feel completely sure of what I'm getting into. So I read every Stanford paper. They have great, great, great research comes out of there. You had to dig for it. Chicago Booth hvs a bunch of books. I mean, I maybe have. I'm not being sarcastic. 50 pages of notes from podcasts like these. And so research spoke to anyone and everyone that I could that was in the space that would be willing to speak to me, that would be willing to support me. Every time someone calls me and says I'm going to start something and I go to their website and it's word for word, the same words as us. 1% of me is like, couldn't you have used different words? And 99% of me calls them and says anything and everything. I'm here for you. How much and where, I don't care. I'm there. I want to support them. That's what I would do again, the thing I would not do. Oof. I would not do it alone. I would not do it alone again. I did it alone for the first two years. That was really hard. I would find a partner that complimented, not my opposite. I don't believe in opposites attract. I believe in being that it complements and it's compatible. And when you put your two hands together and you put your fingers together, it makes a hole. That's what I would look for and that's what I found in the partner that I hired. But it took two years later. He had the lower middle market buyout experience that I needed. I had the marketing fundraising strategy experience that he needed. That's what I would recommend that. I did not do that. I wish I did earlier.
[00:58:41] Speaker B: This has just been so great. Only four or five years in, you've got a ton of wisdom. You've been generous, obviously with your time, but just so forthright and so forthcoming with so many either secrets or just great insight. This has just been awesome, Michael. I look forward to doing it again when another four years has passed. Five years has passed. Congratulations on the path you're on. It's really fun to hear about and a great episode. So thank you.
[00:59:03] Speaker C: Thanks for your podcast. I know you gain nothing out of it, but you give a lot out of it benefit. And thank you for allowing us to buy wathco through axial. That was an amazing deal, so thank you.
[00:59:15] Speaker A: If you enjoyed this episode, check out axial.com dot. There you'll find every episode of this podcast, as well as our recorded axial member roundtables, some downloadable tools for deal makers, Axial's quarterly league table, rankings of top small business acquirers and investment banks, and lots of other useful content that we've created over the course of time. If you're interested in joining Axial as either an acquirer, an owner considering an exit, or as a sell side m and a advisor, you can get started for
[email protected] as well. Lastly, if you have ideas for podcast show guests, feel free to reach out to me
[email protected] dot I promise I will respond. Thanks for listening.
[01:00:05] Speaker C: Peter Lehrman is the CEO of axial. All opinions expressed by Peter and podcast guests do not reflect the views or opinions of Axial. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Podcast guests may have ongoing client relationships with Axial.
