[00:00:04] Speaker A: Hello and welcome everyone. I'm Peter Lehrman and this is Master's in Small Business M and A. This show is an ongoing exploration into the vast and undercovered 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 gift key ingredients, and the important factors that can improve your decision making in your own journey in the world of small business. MA 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.
[00:00:59] Speaker B: Hey everybody, this is Peter Lehrman. Welcome back to Masters in Small Business M and A took a extended break in January, getting out of the blocks with the new year. But I'm back and I'm back with a really interesting guest, somebody who I've had a chance to get to know a little bit. Elliot Curlin, who's founder and managing partner of Broadway, got him pinned down finally for about 45 minutes today. So thank you so much for coming on the show and spending some time with me.
[00:01:24] Speaker C: Elliot, happy to do it. Thanks for having me. Look forward to chatting to your listeners at a good group.
[00:01:30] Speaker B: The place that I would like to begin takes advantage of your career and 25 years as a real devotee to the lower middle market. You didn't have a career where you were doing huge multi billion dollar deals for the last 20 years and now you're in the lower middle market doing something new. You've been in this part of the market for 25 solid years in a variety chapters. That creates a interesting lens. I'd love for you to just paint a picture of where you see the lower middle market today.
How has it changed in your mind and how has it stayed the same over the last 25 years? Give us a sense for sort of how you see this market as having evolved and not evolved over a meaningful period of time.
[00:02:13] Speaker C: Like you said, when I was an investment banker starting my career, I've worked with a lot of really large companies, the AT&TS and media ones, and it was a different approach to thinking about business. Capital markets driven some M and A driven a lot of most of our clients were either public or we were raising a lot of money for them to launch and to put satellites in the sky or fiber in the ground. When I started working in private equity in the middle market back then there wasn't so much a lower middle market. You either were 100, a $400 million fund or you were over a billion. There weren't that many over a billion compared to today for sure. The ones that were were 2, 3, 4, you know, a really big fund, $5 billion. And that's still a big fund. But of course there's many of them now and there's many that are quite large and can raise those funds every fund cycle. So it's spread out. The lower middle market has become a little more defined. And are you focused on under 5 million of EBITDA? Are you focused on 5 to 10, 5 to 20, 20 to 50? Right. And you start to carve up the market a little more finely. It feels like the other trend is as there's been more and more competition, you've seen a lot of traditionally lower middle market firms, maybe that was two or three funds ago for them, move into more the middle market. And what today a lot of people think of the middle market is kind of being more the billion, $3 billion fund size.
So you've seen them move upstream and as this happened, they've increased check sizes, they've changed the number of companies in their portfolio, maybe the size of companies they're targeting or how they're deploying that equity. And after a few funds of that getting bigger and bigger, it seems like some of them are coming back downstream. Maybe not all the way to five or $10 million EBITDA companies, but they're developing new strategies to return to kind of their roots, heritage funds, legacy funds that can let them focus back closer to this end of the market. Because there's a lot of activity here. Kind of a second theme I might hit on in terms of change, not just in terms of the capital. Participants on the equity side would be the companies and advisors in the market, the degree of sophistication of sellers. I like to joke that when Mitt Romney ran for president, that's when everybody started hearing about private equity. Who is this guy? Where did he come from? What's Bain Capital? Of course, he'd been doing it for a long time before that and started back in the 80s. But really in kind of that 2010, 2012, coming out of the Great Recession with a lot of focus on the capital markets and just our economic capital system, banks, investors, private equity, hedge funds, you started to hear more and more in the common parlance as that happened then I think sellers heard about it, they started to get more educated and there's more and more buyers now. This end of the market is clearly more competitive. The flip side is I'd say there's also a lot more sellers. There's a lot more businesses that are owned by second, third generation families or owned by a founder who's now getting up in age and are looking for an exit. And 20 years ago they were there, but there wasn't as much of an ability to find them. There wasn't as much of a marketplace for that. There was still a lot of we're going to keep the family business in the family or I'm going to sell to an employee because multiples weren't this high and I wasn't looking to get a 12x deal. I was looking to get a fair deal at six times and my employee didn't work for me. Reward that loyalty and they could pay me back with the seller note. And now we have more financial tools at our disposal to help create larger liquidation events for sellers. And so they've also become, I feel like, more sophisticated. And there's more advisors around now to help with those transactions, all sorts of different specialists and experts. So the whole market's really evolved. It's gotten bigger, sure, from my standpoint, from other standpoint, maybe it's gotten more competitive, but it also feels like there's more opportunity.
[00:06:19] Speaker B: What about the core ways to make money in the lower middle market as an investment professional and as an investment firm, has that changed? How are you guys thinking about your underwriting and money making opportunity and return on capital in the early 2000s? And does that sound very similar to the way you talk about it today? Or have the routes to good to great returns changed a fair amount over this period?
[00:06:47] Speaker C: Working backwards, a trend that has happened is prices have gone up over time.
If you use a multiple of cash flow or a multiple of EBITDA as a proxy for that price. Looking at the last 12 months, I mean, we used to kind of be able to look at things more on an ltm, maybe a prior year basis. And then people push to LTM as of last month and there's always a push to try and get it to pay forward a little bit towards end of year or next year. But if you look at it on kind of an LTM of multiple of ebitda, prices have gone up over time. And so that's been funded a couple different ways. The major ones, of course are more debt as you would expect more leverage, but also more equity contribution and to some degree, maybe more seller participation as well. Thinking back, at least in my experience, 20, 25 years ago, we didn't often have sellers roll over into the new structure.
So it was more of a clean control transaction at close.
But our equity contribution was much lower as well. And of course, when I started in private equity in 2000, I was working with former Goldman enforcement, Little and other early private equity participants in the 80s and 90s who said, you know, 10, 20 years before their equity contribution would be 5, 15%. That was kind of mind blowing. Then we were much more in that 20 to 35% range, 40% range. Now it feels like given where multiples are and where lending is, you're expected to be much closer to 50, even 60% of equity of the capital B from equity. And so that's changed return expectations, I think across the market, it's changed closing leverage levels and it's really tweaked the fundamental driver of returns because returns when you were putting on two and a half times, three times leverage with a five times six times transaction investment, or you're putting on more if the assets could bear it, a lot of it was asset based.
And so it was terming out, you were paying it down using the cash flow of the business to fund the acquisition to pay off the debt. And that was kind of the traditional model. And by the way, if you could sell it then for another turn or two because you've grown the business or made it stronger or whatever, then you got some multiple expansion. It feels like now there's a need to kind of acquire growth or bet on more of a multiple expansion because you're selling up market to some of these larger funds at the top end of the middle market. And so I do think the return calculation has evolved, but I think there's multiple drivers of it and then I think there's multiple symptoms of it, which you see in terms of market participants structure, financial instruments and tools available to try and keep returns obviously much more attractive than the public market returns.
[00:09:47] Speaker B: I was going to ask you what has driven the increase in equity contribution trends more than anything else?
Why was Forstman little able to buy a business with 5 to 10% down? And now it's to your point, 40 to 60% or 50 to 60%, what
[00:10:05] Speaker C: changed there in those traditional, more legacy LBOs, you had a high amount of asset value and so your asset lending can cover almost all your purchase price. Purchase prices would look a little lower, but you Also had very expensive good assets that had been invested in the form of capex and growth. And you were able to lever those to a degree that allowed you to put in a low amount of equity. But as prices increased, maybe as lending got a little more conservative or and maybe both, as your asset values started to taper off, or maybe there wasn't the same investment in assets, you started to have a need for more cash flow type lending. So you could fill that with junior subordinated debt, you could fill that with cash flow loans as they came to be more and more popular, or you could fill it with equity. And depending upon purchase price, lenders over time I think have also come back and said, look, we shouldn't be the only ones funding this. We're funding incredible returns here to the equity. We want to share in that. And so there's more equity underneath us now to give us confidence in the price, but also to help fill in some of that gap between asset value and transaction value, purchase price.
[00:11:29] Speaker B: Your first private equity job was working with three partners who all stepped out of McKinsey, Bain and BCG.
So, consulting DNA, what was the operational post transaction level of involvement 25 years ago?
Has that changed? Or when you look back and think about how involved they were and their consulting DNA, does it actually look quite similar to the way that you've modeled elements of what you guys are doing at Broadwing 25 years later?
[00:12:02] Speaker C: Private equity over the last two or three decades has evolved not just from a size standpoint like we were talking about, but also from a playbook and a specialization standpoint. 25, 35 years ago, it was very much about the financial structure of the investment, of the deal, and a lot less about how are we going to help improve this business or how are we going to change this business? It was identify a good business, find an opportunity to finance it, to acquire it. Because again, there wasn't as active a marketplace for transactions. They just didn't trade hands like they do now.
And so find a good deal, find an opportunity to invest and then support management, be there, be an active board member, help put in metrics and dashboards and KPIs to help management be equipped with the data they need, particularly in the lower middle market. Still, even then, a lot of companies might not have managed by the numbers, might not have had access to the technology to track all that. As much as over time, as you're trying to broaden the pool of potential investment opportunities, you see firms also start to specialize more. My prior firm was really One of the leaders in operational private equity. And how do we lean in to the opportunity to help companies really improve in a very tangible, tactical, ongoing way with in depth value creation plans and a plan to implement those with management.
And so you did start to see a group of investment firms and you know, a lot of really big, well known names now that started much smaller, looking at complex situations, special situations, turnarounds, underperforming companies.
And part of the value add, part of the way to generate alpha was to work on the operations. But that wasn't everybody. There's still folks that liked healthy and growing companies were more consumer focused. So you saw other ways to specialize. When I think back to the late 90s, there were firms that specialized like Providence Equity and Telecom. There were obviously vc, but the thing about private equity, but a lot of the firms were very generalist. And over time in the 2000s you kind of needed to have that industry niche. And then eventually 10, 15 years ago, you needed to have operational support. And so you started to see operating partners for the troubled portfolio companies and then eventually operating partners for all portfolio companies. And now maybe not just operating partners, but specialists in Lean or HR or Marketing or Cyber that help across all the portfolio as well. I would say that's another way that the industry's evolved. But when we were there 25 years ago talking to sellers, it was we can be supportive of your growth plans and abilities. We've got the capital markets, we've got strategic consultants, and here's how we can help break down your business, understand your business and how you can grow it, but much more in the way of letting management run with it and bearing all that weight themselves as opposed to trying to be a little more active with them.
[00:15:12] Speaker B: What about the evolution of the sell side investment banking profession? When you were buying businesses in the early 2000s, what was that market like? Who were the banks that were involved? Were there thousands of business brokers and lots of small boutique M and A advisors? Has that part of the system changed in meaningful ways? I'm curious, was Goldman Sachs selling lower middle market businesses in 2002, 2003? How did that work?
[00:15:42] Speaker C: The bulge bracket and large money center banks were still dealing with larger clients.
I would say the bank of America's, Merrills, Lehman's going back a ways, Morgan Stanley, JP Morgan, Goldman were still advising the large industrials on their non private equity transactions. They were talking to the Fortune 50, Fortune 500, the Dow 30, as well as lower market groups. But the private equity groups a lot of times at the bottom bulge bracket, banks were focused on those billion and up funds. For the smaller ones, we would get introductions from accountants, from lawyers. There was a lot of personal connections as well as there were still boutiques. But some of those names have been acquired now. I think of like a Goldsmith Agio which used to send out what looked to be leather bound sims with wire. Right. So it was like they had hard covers. Of course, everything back then was pretty much FedExed or maybe faxed. You couldn't attach too large a file. So we would get sims in the mail after you'd faxed over the NDA and Goldsmith would send over these beautifully bound ones that you felt bad to throw away after you read it because they spent so much time on it, they were acquired later. Houlihan was around. Baird and Blair were active. Jeffries was more of a participant in that lower end back then. Then you'd see regional banks as well that had clients, but maybe not the efforts in terms of a group and the accounting firms. We would see stuff from the big five, whatever it was at that point.
[00:17:14] Speaker B: And today you would say that there's far more channels to reach sellers in the intermediary. You feel like it's just the names have changed, but it's more or less the same ball of wax.
[00:17:24] Speaker C: There's many more channels. There's certainly the digital opportunity to connect and to advertise, to make aware that wasn't there. Steel's a great example of that. How do you get your name out there to somebody you wouldn't even be connected to otherwise? They used to take a person to person relationship, but before you know somebody and then trust them to share. But I also think smaller companies weren't marketed to smaller funds. There weren't the independent sponsors out there, there weren't the deal by deal. There were, but there weren't a ton of what used to be called pledge funds or pass the hat funds or deal by deal. Fundless sponsors. The independent sponsor phenomenon now is vastly evolved from what it was 20 years ago in terms of financing, backing, equity availability and opportunities to invest back then. Who would somebody sell a company to? An employee, a family member, somebody who was looking to switch careers, getting out of the accounting firm and wanted to acquire a small business or graduated from college, maybe wanted to acquire a small business. It was much more kind of a personal relationship to know about those.
So now it feels like a lot of business sellers know that there's brokers out there that could help them. There's digital marketplaces or they've already been contacted, they've already had inbound calls. And so when they're ready to sell, they have a stack of letters from interested sponsors or independent sponsors or investment bankers saying let me represent you. Whereas 20 years ago that just wasn't the case.
[00:18:55] Speaker B: You're a generational Texan, if I'm not mistaken. Born and raised in Fort Worth and I've been to your offices in Dallas. The family office capital in Dallas is maybe one of the most robust I've ever seen. I've been to old Parkland and got lost in there a couple of times.
[00:19:14] Speaker C: Easy to do.
[00:19:16] Speaker B: Yeah. I'm just curious how that's evolved. Where family offices are meaningful LPs today very consistently backing emerging managers, repeat managers, starting their next opportunity, leading investments, in some cases certainly backing independent sponsors. There's a lot of activity where family offices, both in Dallas and just around the world and around the country are a huge part of the conversation.
How new is that? Was that a meaningful source of funding in the 2000 and tens, or does that represent a real change to the complexion of the LP base for private equity?
[00:19:54] Speaker C: It does represent a change for private equity. Not to say they weren't around before. If you go back decades, a lot of the families were actually some of the ones that helped start direct private investing. Outside of what had been their traditional source of wealth creation. You would have family offices even going back to like a Vinrock. Certainly here in Texas. You saw in North Texas a lot of energy families or real estate families do that. Hunts and basses and rainwaters. And over time you would have spin outs from them that might be private equity funds as well. More of a dedicated institutional LP base with a blind pool. But the family offices are still very active. A lot of those older ones have grown and maybe had the scale to bring it in house.
In some ways private equity has probably helped that proliferation by creating exit events that were very meaningful for sellers who now are out of the industry. They knew maybe they rolled over, but maybe they're out of the day to day operations of the industry. They knew and they have a large pile of wealth wealth to go invest somewhere. And where do they put it? The family offices all seem to be a little unique, like a private equity fund. Right. We try and differentiate and we have our strategies and it looks a little different. And family offices differ as well. But there's such a number of them now they do provide great backing, whether it's as an LP or as a co investor or all sorts of different arrangements as well, some of them club up, sometimes create their own fund to then go invest in other funds or other deals. It's provided a lot of different flavors that you can partner with or choose from, so to speak, to access new sources of capital besides your traditional institutional LPs and blindfold funds.
[00:21:46] Speaker B: Do you feel like their role has been more of a benefit to private equity as a growing partner to private equity? Or do you feel like their appetite to lead and club up on deals and do deals directly has led them to be more competitor than partner? I've always gotten the sense that they're more partner than they are a competitor. But people maybe like to talk about the former more than the latter.
[00:22:11] Speaker C: I think they're definitely a partner. It's a huge benefit to private equity because it's a capital source. It's a smart capital source. Generally, they've been operators and entrepreneurs before, even as over generations, and they think in a very sophisticated way about managing their wealth and diversifying. A lot of family offices may have a foundation. They may still have operating companies.
They may have multiple different asset classes they're investing across.
They can be great partners, thought partners, as well as capital partners. There have been family offices for a very long time.
Over 20 years ago is when I recall doing our first investment with a family office. It was on the smaller side.
It was one of our earlier deals. Every family office has their own goals, desired level of activity and involvement, information flow and expertise that they bring to the table. A lot of times, if you're talking to family for a direct investment, there's kind of two flavors. Hey, we're looking at this industry. You've been active in this industry before. We'd love to benefit from you as an investor with those relationships and that experience, and that gets them excited. And then there's other families I've talked to who don't want to invest in that legacy industry. They still own assets there. Maybe they know it too well. They're looking to diversify. Outside of that, it's almost like you have to get to know as many as you can because they all have different investment objectives. That can change over time.
[00:23:35] Speaker B: Well, let's get into broadwing, and it's great to cover where you've been. And when you decided to launch Broadway, it built on all of these observations that we've just covered right now. And when you think about what you want to achieve with broadwing, you've got, I think, three or four core platform investments now in the business.
What are the things that you want to achieve with Broadway that you feel are different from your prior private equity chapters? And what about it do you think is more of the same and running back of plays that have worked really well in the past? Do you have new things that are key priorities for you with Broadway that represent a departure from a lot of the successes from the past?
[00:24:18] Speaker C: It's more of a evolving strategy. It's an evolution than a revolution.
What we spent a lot of our careers doing is working with managers directly to analyze their businesses, perhaps create data they didn't have before, use that analysis to drive actionable insights that can allow a company to improve cash flow and margin, grow more strategically, maybe grow in a high return way, and think about how to take care of their employees in an intentional way. We're still doing that here. We've looked at some additional business models. I'd say asset lighter business models. More in the skilled trades, we've always kind of tried to think forward, what happens in a recession, what happens, what happens in an industry downturn? What happens with AI? What happens with other new technologies that come in and try and guard against that, try and be ready for that? We like the skilled trades to a degree or in certain areas because they're not going to be displaced by AI. They might be augmented by it, but probably not displaced. And it's critical. And if anything, things continue to get more and more complex when you're talking about security or safety or H Vac.
We like that. We still like manufacturing. We've seen different waves over our careers of reshoring, near shoring, low cost country outsourcing. But there's still critical components that either due to supply chain considerations or intellectual property innovation, time to obsolescence. Or they need to be made in North America, they might need to be made in the United States. And so we still like niche manufacturing of various flavors and we like distribution services. Distribution manufacturing is where we spend our career. But where we focus will change. Where's the value that we can find within different sectors? Where do we have expertise? Where do we have opportunity to buy? And as we develop our themes and pursue those, we tend to go really deep. Different ways we do that and then if we're fishing in the wrong pond, we'll move on to the next. But we typically have multiple lines in the water at the same time. The other thing that we've really kept is a focus on operational improvement and being a partner with management. The way we deliver that has evolved some, but that's still very much at focus. And the final thing is we're comfortable with smaller companies that might have a little higher margin, but smaller companies that we can help them grow strategically. There's a combination of growth levers that we like to see, but that allows us to have a diversified portfolio and hopefully that means also then a regular harvest cycle for our investors.
[00:27:02] Speaker B: Maybe get into like an example or two. I was listening to another podcast that you were on and it seemed like there was this set of foundational things that you like to put in place post transaction that may be governance, it may be risk, it may be the creation of data that hasn't existed prior. You mentioned the ERP systems and some of that seemed to me like sound business decision making to do, but maybe not like the most interesting work to do, but just like really important, fundamental foundation solidifying work for you personally, Elliot, when you've bought a business, you're now on the same side of the table and what do you like to do with the business owners? What is the interesting work for you post transaction? Obviously some of it can be just foundational and very high value, but it might be boring, some of it might be more colorful. I'm curious, what do you get excited to work on with a business once you've closed the transaction and now it's time to get to work?
[00:28:09] Speaker C: I kind of love it all, to be honest. I'm still excited and enthralled with all of it. There's obviously some things that I'm probably better at and other things my partners are better at and we divide and focus on things to have return to expertise and focus for sure. But I love the foundation setting because I feel like that's so important. The thing that makes it interesting and exciting is knowing where we're going, that there's a benefit to this and the people you do it with. It's best part of business and business building is helping people grow in their roles but also sharing our expertise. They have expertise as company owners, operators, and we have expertise. And having seen multiple companies across different industries and how they can grow and be stronger with a core set of operating principles. I enjoy the foundation setting that doesn't go on forever. And so there's also a little bit of in anticipation. Let's get through this season of foundation setting, of professionalization, implementing some basic tools. Let's think about the sequence of what we want to do next and then pursue growth. Part of our foundation setting oftentimes is continuing to invest in people, new people, helping people grow in their roles or find new roles within the organization and training Culture building, using some relatively sophisticated tools that we didn't come up with to help strengthen companies and their cultures, to train employees, to crystallize some of the vision and the strategy and how we're going to implement that, get that together as a team, get that consensus and then go execute on it. Growth is always fun, but so is becoming more efficient. So is increasing throughput, lowering our cost to produce, moving up the experience curve so that we can become more effective and efficient at what we do as a company. And if we do that, that also allows us to grow because then we become more competitive in the market. I love all of that.
[00:30:09] Speaker B: How acquisitive have you guys been as part of the growth story for businesses? I hear a lot of things that make me think that your DNA is very organic in nature. Just solidifying so many things, continuing to just make the business better. When I'm listening to you just sound like you have a real love for just the organic improvement of a business as it exists today.
What has been the acquisition history for Broadwing so far? Is that something that you guys have done a lot of. A little of very flexible there.
[00:30:43] Speaker C: We've done a lot of. We like to be opportunistic in the acquisitions that we pursue.
We're also very intentional. We're going to be disciplined on price.
We're looking to solve a opportunity or a problem through an acquisition if we acquire one. And so it's generally part of the overall strategic plan. When it happens during the life of the partnership period, that can vary, but we will typically to an investment over maybe a five year investment period, six year investment period, we would expect to do three or four acquisitions.
The lowest we've ever done is zero or one. But typically there's some number in there. The highest is probably 10.
Some industries are a little bit easier. Some businesses are easier to integrate. We're always considering the strategic angle as well. Are we looking to get exposure to customers? We're looking to get into new geographies and it's cheaper, more efficient just to acquire our way in rather than put up a new plant or to launch a new greenfield office.
So there's different strategic considerations.
We look at it from a return standpoint and we also like to still be able to grow organically, whether that's new products, same customer, same locations, or looking at greenfielding new locations.
[00:32:00] Speaker B: Maybe we could talk a little bit about people, Elliot, and just your journey, assessing people and assessing owners and assessing managers.
What is core to the people evaluation process for you when you're Evaluating founders and management teams. What are some of the guiding principles that you think you've distilled and that you tend to return to when you're just assessing people and thinking about the talent in place or the talent that needs to be in place?
[00:32:29] Speaker C: We have our own operating principles. We think it's important for a company for an organization to know what their operating principles are.
A lot of times those are more subconscious. It's kind of shown in the way they do things. We share ours with our portfolio companies, encourage them to articulate their own, at least as a leadership team, to know what that is and to be able to live with those. That shows up in how they conduct themselves in the marketplace and how they treat their own employees.
But to go a little deeper on the employees, we also like to work with management to create stakeholder impact plans. And these show up over the life of an investment in different ways. A lot of times management or owners are already doing certain things for their employees. This is a way of organizing those activities, thinking about actually investing in those activities and where we want that future state to be at the end of our partnership. There's multiple different categories there that we run through with them and then start to chart that over time. Time. Another element to that we talk about enhancing companies cultures and communities is how can we give back to the community? Can we be stronger there? Can we be more present?
Does it just have to be money? Or can we find a way to be involved, to bring them into our company or to get more involved in the community to help strengthen strong communities, strong nation and strong employees. We're providing jobs for employees. Benefits the family, but it also benefits the community.
We want to empower management to strengthen both of those elements.
[00:34:06] Speaker B: How is that taking shape? How are you guys doing that? What does it look like?
[00:34:11] Speaker C: There's a number of ways that we approach it. We try and do it in conjunction with management. It's not prescriptive. It's more of a we'd like to have this activity level, what the activities are. We want management to fill ownership over the company. Fill ownership over. A lot of times it looks like educational. So how do we equip our own employees and the skilled trades that can take on a very tactile approach? How do we actually train people to not only perform the licensed or the skilled trades that we execute on, but is there a career path behind that? And can we give them opportunity within the company to advance as a leader, as a manager, as an employee? It can take on the form of what I call kind of the lived experience at the company, whether that's having on site counselors or remote counselors available.
We've worked with companies where there's room and where folks come into the company as opposed to going out from it every day. To have childcare, to have an on site gym or fitness program, to have dietary counseling.
It depends a little bit on the workforce and the location.
But these are the types of things as you can imagine that you might plan over months or years to implement. But also you need to be able to listen to your employees and see what matters to them. There's a little bit of a environmental aspect to it as well, depending upon the company and thinking through what's our impact, how can we increase recycling, how can we make sure that we're measuring or trying to reduce our environmental footprint? But that's just one of the components and we'll do that analysis upfront. We track it generally on an annual basis and then again at exit. And we're trying to measure certain ways that we've improved the company as well as the lived experience of the employees.
[00:36:04] Speaker B: Are there traits or attributes of founders that you really look for when you're thinking about having them be the CEO and rolling 20, 30% of their ownership in the business? I'm curious what patterns you use when you're thinking about the private equity readiness of a founder that is running a family owned business or a founder owned business. And are you assessing their readiness? On the last day that they own the business, they're a bootstrap founder and then the next day all of a sudden they're private equity backed CEO. What have you learned about that process and what kinds of people do you think do a great job of making that transition?
[00:36:44] Speaker C: One of the keys to making that transition is understanding what your own personal objectives are in selling to a private equity firm that looks different for different founders. What I mean to try and be a little more specific is what do you want your life to look like the day after you sell to private equity? Do you want to be involved? Do you still want to have a desk in the same office where people still come to you for sign off on, on every little detail of the business? Or are you looking to step out of the business? And if you're looking to transition, is that an immediate transition because you're going to have a lot of time on your hands, or is it a more gradual transition? Do you want to stay involved as a consultant, as a brand ambassador, as a part time presence? Let's really Nail down what that looks like. That two days a week, which day let's align expectations is really the key? Or do you want to drop the keys as we say, and just kind of go fish, go golf, buy a boat, move away. Those all have different implications for us as a buyer. We have to plan differently before close and we need to assemble or consider the team perhaps differently as well. Do we have more leadership that we'll need to bring in for day one, or is this a gradual transition?
That's a big one. Aligning expectations up front, spending as much time as we can thinking through in a granular way what will happen post close, who's still running the business.
We have several tools that we use with management to help think through. If you're sticking around and continuing to lead the company, what does it look like from an authority standpoint, from a governance standpoint, from a decision making and sign off? Because entrepreneurs owners aren't used to reporting to a board, to a boss, so to speak. So trying to help them see that too, to make sure we're aligned on what it means for us to be control owners and fiduciaries, but also for them to run the business just in a different way. There's other table stakes, things we look at and expect. Integrity. Got to be able to trust people. We try and spend a lot of time with each other. We try and research backgrounds and do references and everything like that as well. But integrity is huge. Excellence is important. The companies that we get most interested in are typically really good at what they do. They may not have fancy technology systems or degrees after their names or management practices, but they tend to be very good at what they make or do as a service.
And they tend to take care, or at least they care about and take care in their own way of their employees. Employees, they typically have a team that's very bought in and appreciates the mission of the organization.
And we like to see that if an owner hasn't cared about their employees and if we have doubts about the integrity of that individual, it doesn't matter how good the price is or what we think we can do with the company, that gives a serious pause.
[00:39:42] Speaker B: Are there examples that you've run into where the founder go through that aligning process with you and they think that they have a clear point of view on what they want after the transaction closes. And since they have only done this once and they've never done it before, they turn out to not actually know what they want. And all that alignment and all of that preparation all that time that you spend trying to be clear with one another just kind of ends up with them being either a poor fit for the opportunity or they change their mind. I'm just curious how well they know themselves and how well they're able to forecast exactly what they're going to want and how it's going to feel. Given that in most cases you're buying businesses where the owner hasn't run them as a private equity backed owner before. I'm just curious how well they can see their own future and how well they forecast what they actually want versus what they think they want.
[00:40:42] Speaker C: It's always hard to see the future and sometimes when it's about ourselves in particular, it can be even harder. It's hard to know the desires of the human heart, anyone else's or even our own. I think you identify something that is a real consideration.
Some owners and sellers probably struggle with it more or less.
I don't know that there's any general rules that I've. I've really come up with on that because everyone's so unique and complex. Every situation, every company, how they've structured it, grown it is so unique and complex. And to sell control, but then to still be in the business. There's a number of different reasons why that could be appealing to a seller. They love the people, they want to diversify risk, they want a capital partner for growth. They know the business needs to improve before they can sell it for even more money next time. And so they need a pull partner to help them with it. They don't have experience with M and A. They don't have experience with new plans or they're on the tail end of their career. But they don't want to feel like they're walking away from relationships or commitments. You start to put in all sorts of variables like that, it can get hard to tell. There's a range probably of how well people do it in our experience is something that is kind of bespoke, is tailor made to that seller, to that situation. And we try and work through it. I can tell you there's not many sellers we've come across who don't want anything to do with the company afterwards. They may not want to work at it day to day. It's not like they don't care. They still care about it. It may or may not be their name on the door, their family name. They may or may not have owned it for decades, but they still care. They care about the customers, they care about the employees, the suppliers, they care about the buyer, they care about us and they want the investment we're making in their company to pay off. We typically have a high degree of support communication, post closing and that's a great benefit to us. We appreciate that.
[00:42:40] Speaker B: Maybe before I let you go, Elliot, we happen to be speaking first month of February here.
Public markets are rotating aggressively out of software businesses, technology businesses. There's been some really profound developments from some of the major AI businesses in the last couple of months, really significant product releases.
Two months ago you guys announced the acquisition of Cloudscale365, which is broadly speaking in the technology category as an MSP and in some cases probably a reseller of software.
So far in this conversation we've largely talked in general terms about changes to the industry approaches that you and the broad wing team take. It'd be great to just hear some of the specifics on this transaction.
What got you comfortable with this opportunity? What makes you excited about it? How did you guys approach some of the AI considerations and the just changes in the technology and software landscape? I'd love to hear you sort of take all of these principles on people and culture and community and excellence and how they take shape in the form of a recent investment like cloud scale.
[00:43:51] Speaker C: A lot to cover there. You hit on a lot of topics. So let me try and take a few in order here. From a sourcing and thematic standpoint, it's an industry we'd been looking at, a business model we'd been looking at for a long time, for about a year and a half, which is not, you know, atypical for us. We met with a number of companies, different sizes, different focus and we really settled in on lower middle market, small medium sized companies as their customers. And so a focus on regulated industries, data secure type industries like physicians practices and rural hospitals and registered investment advisors and law firms, private equity firms, financial services.
We like that it was focused. That's not all they do. They serve all types of companies.
If you're listening and you need help with any of your companies for IT services, I'd be happy to connect you with the best.
[00:44:48] Speaker B: Let's do that.
[00:44:48] Speaker C: But we like that focus. And so that's really our plan to keep building on it from an AI standpoint. We view that as an opportunity both internally and externally. It's an opportunity for the company to be efficient, to use AI in a few different ways as a services business and to advise clients on it. Because almost everybody, all companies today are wondering how can I use AI? What should I do? There's software now coming out for that are very industry specific and task specific. How do I implement that, how do I train my people on it, how do I make sure my data is secure and not getting dumped into this big LMM out there that everybody, all my competition could use or something. And so there's additional services we can use and that's top of mind. But there's also a lot of traditional IT services that we offer, including hosting, the monthly kind of maintenance, firewall protection, cybersecurity, all the licenses to manage all the onboarding of new employees.
And so that's 247 if you think in terms of a circle cloud scale. 365. Right. We provide total protection around the clock. And to your point on the business model, one of the things we liked is the company's really good at customer service and serving customer. You see high recurring revenue, you see high customer retention, low churn. Those are important metrics in this industry. You see high monthly recurring revenue because there's not as much implementation, there's not as much value added reselling, there's hardware installation and projects. But a lot of this is recurring monthly services.
Those are the some of the things that attracted us to the company. They've got great organic growth and we want to invest behind that. We want to invest behind new products.
We think our services can help a number of different small and medium sized business sectors. And so we're looking to branch out there. And then there's always the potential for some acquisition growth too.
[00:46:40] Speaker B: Did this founder want to put down the keys or was he excited to reload with you guys on his team?
[00:46:47] Speaker C: In this case, he was willing to help us post closing. But one of the things that made us attractive as a buyer is as we developed the theme to been pursuing it. We did it in conjunction with an industry expert who could be in management, could be a board member, but was a member of our advisory network. And in this case the founder wanted to retire fully from the day to day, still be helpful. And so we structured an arrangement. We're still engaged, still helpful, get emails from him kind of every day, every other day. There's still a lot of communication. He's still an investor and excited about what we're doing. But we were also able to bring in a new CEO who could help diligence the company. That's a great benefit. Here is he knew the diligence. He was able to talk to the customers, employees beforehand, help vet and create our value creation plan. So that day one he was able to Hit the ground running and be very much up to speed. But it was also a great benefit to the seller that we had that type of relationship.
[00:47:45] Speaker B: That's a great story. I mean, I'm conscious of your time.
Maybe I'll just close by saying it. There's so much temptation, I think, from private equity to sort of playbookize everything.
It seems like despite you having 25 years of experience and tons and tons of transaction experience, it seems like you have continued to just appreciate the uniqueness of each opportunity, the uniqueness of each business, the uniqueness of each founder. And so I'm sure you have plenty of plays that you run, but it does strike me that you're particularly resistant to saying that this round peg goes in this round hole and this square peg goes in this square hole. And it seems like you've held onto a belief that every situation is different and needs to be thought of in a very bottoms up way.
And it's refreshing to see that because there's a lot of marketing sizzle around playbooking this and playbooking that.
It seems like you're willing to just slow down and assess each opportunity one at a time. So it's great to see that really comes out in the interview.
[00:48:50] Speaker C: Thank you. It's easy to want to just do it all. We've got all these great ideas, and we've seen them work before. We have to prioritize. We have to give management room to run the business as well as try and run our playbook. It doesn't mean that our plays don't apply. We wouldn't have benefit. But there's prioritization. There's ways in which you have to do that. We have to be sensitive to the people there. A playbook, without the people to implement it, it's kind of useless. So it's not something where you can just kind of take great business principles and say, AI, go help advise and go partner with this company. We still need people on our team, and we obviously need people at our investments who share the vision and are excited about what they're doing and creating and who they're serving, their customers in the market and how they're competing. And together we can do something even more special.
[00:49:38] Speaker B: Ali, it's a great place to close. Thank you so much. I've learned a ton and enjoyed the chance to get to know you better and excited to follow you guys in the years ahead here. So thanks again.
[00:49:48] Speaker C: Appreciate it. Always appreciated the business you built as well and appreciate your partnership.
[00:49:53] Speaker B: If you enjoyed this episode, check out
[00:49:55] Speaker A: axial.com there you'll find every episode of this podcast as well as our recorded Axial member roundtables, some downloadable tools from Dealmakers, 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
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[00:50:31] Speaker B: Thanks for listening.
[00:50:40] Speaker D: Peter Lerman 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.
