Speaker 1 00:00:03 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 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 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
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Speaker 2 00:01:02 Peter Larman is the c e o 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.
Speaker 3 00:01:21 Hey everybody, it's Peter Lehrman. I am your host of Masters in Small business m and a. I'm happy to be back. It is late summer here in 2023. Really excited to have found a way to get onto Chris Gallagher's calendar, in addition to running a company that's been super busy making acquisitions, he's also growing his family with a recent arrival. So Chris, thanks so much for making some time in late summer with everything else going on to, to jump on and, uh, spend some time with me. Thank you.
Speaker 4 00:01:47 Thanks, Peter. Happy to be here.
Speaker 3 00:01:49 So Chris, we met through, through Axial and through you guys becoming a member of the platform, and I know you guys closed a transaction that you sourced through Axial a couple of years ago, maybe at this point now, but that's only one of of seven deals that you've done in about the same number of years. So I think it's six deals done since 2017. Seven since 2014, and that comes after the Gallagher business, had not done a single deal since 1995. So I'd love to just, we'll get into the background of the business and some of the family history at some point over the conversation, but I'd love to just jump right in. What has changed since, since 2014 that has you guys leaning in far more on acquisitions? Tell us a little bit about what you've been up to since 2014 and everything that you think is is changing. Yeah,
Speaker 4 00:02:37 So, uh, we've actually closed two deals with you guys through the Axle platform, and that's part of the answer of, of what has changed. For a long time, Gallagher was a distributor of, of fluid seals and gaskets, and we approached m and a purely as a, like a bolt-on really looking for carbon copies of businesses that, that didn't, we did that were in the exact same business that we were, i e the, the distribution of of fluid seals, o-rings, gaskets and, and that type of product. And the prospecting, sort of the deal flow there can be, can be limited to a lot of different factors. A lot of it's word of mouth, a lot of it is shared suppliers. And so it, it wasn't necessarily for, for a lack of, of interest, but it was more just calling up the same companies sort of each year and saying, Hey, you guys interested in selling?
Speaker 4 00:03:25 Like, yeah, no, all right, let's talk next year. And we were lucky enough to, to be able to close a deal in 2014, that that was a company that looked very similar to us, uh, brought in some, some manufacturing and fabrication capabilities that, that was exciting. Uh, historically to that we had been just a sort of a value added technical industrial distributor. But once we got through that, that swallow, which, you know, was, was a big, a big deal for us, about 50% of our revenues took on another 30 employees, another branch. So as we started to kind of come back into the market in 2017, 2018, and said, all right, what, what else is out there? I intentionally sort of pitched a strategy to our board and our shareholders about if we're only gonna look at companies that look exactly like us, then we're, we're cutting off such a big segment of the marketplace.
Speaker 4 00:04:14 And so we had to have this like really in-depth conversation about what it is that, that we at Gallagher do. And as a distributor and, and fabricator and manufacturer of technical industrial components, albeit historically focused on seals. There were other ancillary industries, fluid power, semiconductor oil and gas, aerospace, different products, sort of segments that have sort of niche distributor groups that we wanted to take a harder look at expanding into having conversations with some of those companies. And, and that was really where reaching out, I've been aware of axial that know they had existed, but that was when we, we really signed up and, you know, started looking at, at companies that were a little more diverse than I think in the nineties and the early two thousands that we would've been willing to look at. So, uh, I think, just to answer your question, a big part of it was sort of looking over the horizon there a little bit more. I think having the confidence in, in what our sort of like core value proposition was and, and if the products or the customers looked a little different that we were still gonna be able to adapt to that. And then the second part was that getting through that acquisition we did in 2014, we, we were a bigger company, we had more, more cash flow at our disposal and we were able to accelerate the, uh, the pace of, of how many deals we were doing.
Speaker 3 00:05:29 Could Could you talk a little bit about the, the pitch that you had to make to the board and the shareholder group to sort of get this broader horizon line in place as you thought about acquisitions? I really wanna unpack a bunch of sort of family owned related issues in, in the conversation because I think it's a great place to pull on in a number of places. So let's let, let's start there. How did you do that? That was, you know, that were you c e o at that time? Were you not yet the c e o of the business when you made this pitch?
Speaker 4 00:05:59 I, I was at that point, I was the c e o of the business. I became c e o of the business in January of 2017. And, and I think the, the pitch was the following is that, you know, we can continue to grow, you know, g d p plus maybe a couple of percentage points, continue to invest in the business and pay the majority of our, of our profits out as, as distributions to our shareholders. And that's, we could have done that, but we at the time and are, are currently still owned, primarily this is a company, my grandfather started in 1956, he passed away his four children of whom my dad is one of 'em. They, they own the, the overwhelming majority of the business. And so really balancing and making a pitch to them that, that we could grow this business exponentially, that we could leverage the cash flows and the profits of this business by making acquisitions at reasonable multiples and, and really having to a degree as possible the, the cash flows of these acquired entities supporting a reasonable amount of debt service.
Speaker 4 00:07:01 And, and at the end of the day, it's, it's a pitch to have the ownership group invest in the tax burden that comes from these newly acquired entities year in year out, because we are an S corp, so that that tax burden is born by the, the individual shareholders. And we're able to model out that after a few years of, of some sacrifice there, there's, there's no way to, to, to sugarcoat that, that we, we did have to invest in the business that, that we were gonna be able to get the company to a level of, of cashflow and distributions where the shareholders would be able to retain sort of the short-term benefits that they were getting as the company looks in 2014, 2016, but also generate this whole pile of, of cash flows over here that we can yes, continue to, to strip off and, and improve the, the short-term look, um, outlook for, for the shareholders, but to, to have those, the newly acquired entities support continuing an ongoing m m and A.
Speaker 4 00:07:54 So it was sort of like getting past this first or two first cycle or two of, of m and a and, and getting, getting the balance sheet looking right to where we were able to get beyond where things would've been and also have this, again, this engine to support instead of an acquisition every 10 years or five years, multiple acquisitions every year, which causes a whole new series of <laugh> headaches and integration work. But just from the, from the pure financial side of things, the pitch was, you know, after a cycle or two of, of, of m and a, we were gonna get to where you are now, but have this, this other part of the business that was gonna be able to fund growth. And, and if we can do that, wouldn't that be amazing for you? They're, they're in their, their mid to late sixties, so they're, they're not going anywhere hopefully anytime soon. And, and for us as the, the next generation of owners of the business, so we sort of more mouths to feed <laugh> as we look at it. And so we, we knew that we had to grow the business too to continue to have the type of financial return that, that the four of them had, uh, been able to achieve.
Speaker 3 00:08:54 And so was it put to a vote, I mean, just to get into some of the like maybe sort of H B O succession style details, like did you guys vote on this? Was it like, how did it, you you pitched it in a board, uh, board setting, when did you feel like you had a green light to begin actually pursuing this new approach?
Speaker 4 00:09:11 It was interesting. For a long time, the, the board essentially was our four majority shareholders. And then at a certain point I became a member of the board. But when I became c e O in 2017, we knew that that as a board, we, we lacked expertise in, in certain areas. And so, and as a 36 year old at the time, coming into a first c e o position, I think there was a, a feeling that, that there was more they could do to, to help mentor and guide me as a board. And so it, I became the C E O, but we also recruited, searched and, and retained three outside directors in addition to two family member directors. So the board looked a lot different January 1st, 2017 than it did the year before. And a lot of these strategies were formed with that, with that group intact.
Speaker 4 00:10:00 And so the share, the two shareholders who were on the board had had votes and with this strategy, but the other two, as shareholders were not actually voting on sort of like formal company policies. Now, if they didn't like what was going on, they, they certainly had the right with the other shareholders to change the composition of the board, but it was more, more a collaborative shareholder than outside board member group at the time. And I think the, the outside board members were even more aggressive on sacrificing short-term profits for, for long-term gain of the, of the company. And that <laugh> ended up costing some consternation over the years, and we had to sort of rightsize that, that balance a little bit. But I, I would say that the key there really was, was communication. You have, uh, very different levels of financial literacy. I'm talking corporate financial literacy, finance, business acumen, corporate financial acumen amongst the, the ownership group.
Speaker 4 00:10:51 And for a long time, the, the definition of the value of the businesses is what was our dividend last year. And so when you go to someone, you say, Hey, we, we increased the value of your equity by 30% in two years, that didn't really hit home as much because we're not selling cat, we're not selling equity, we're not taking on partners. We have no interest in selling the business, at least as far as I'm aware. And so it, it, that didn't really deliver any short-term financial results for them. So that's where that threading that needle really, really had to happen. And it came with a lot of collaboration, a lot of communication. And I think it also came with me steadily getting more confidence, both in myself and both from, from the ownership group as as honestly as we delivered results. I mean, the company that we were in 2014 were, we're five, six times bigger than we were back then in, in our every metric or K P I that you could look at has grown not only in size but in inefficiencies.
Speaker 4 00:11:49 I mean, our, our profits are higher, our opex, the percentage of revenue is lower, our margins are higher and, and on top of just tremendous m and a activity, but also organic growth. And, and that's been, you know, I didn't even mention this, but, but that's what has been the challenge of these past seven years, is growing a business through seven acquisitions, but also in some years double digit organic growth. A growing organic business chews up a lot of cash <laugh>, I mean, working capital is, is not free. And that's, that's something that has, has also, it's, it's a, it's a privilege problem. It's a, a problem that I'd rather have than not in terms of our AR is up because we grew the business 14% organically last year. But, you know, it's, it can be a problem nonetheless. And it requires, I think, just better forecasting, better collaboration with our financial partners. And I think a little more discipline on sort of just the whole cash conversion cycle,
Speaker 3 00:12:44 The whole process by which the business moved into like an acquisition mode. It sounds like the 2014 acquisition was a very big acquisition as a percent of total revenue. That acquisition was done when your uncle was still running the business as c e o. You joined the business in 2011. So you were there at the time. How have you guys been getting better at the acquisition process? Like what and how have you, how do you get better at, at doing m and a? You're, it's not Danaher, it's not Roper Industries, it's not some like huge m and a machine that's professionally run by professional managers and has been doing m and a repeatedly for, for decades and decades now. This is something that you guys have relatively recently decided to commit yourselves to. It would be be really interesting to just hear where you're getting better at m and a and, and how you go about trying to get better at, at growth through acquisition. Just what does it boil down to?
Speaker 4 00:13:39 Yeah, and that's, I mean, that's what I wake up every morning and, and I'm ask asking myself that question. And Danaher is a, a great example. I mean, they're definitely a company that I have a tremendous admiration of their many Danaher portfolio companies are customers of ours. So I have a lot of experience with, with how Danaher does business in the marketplace. Certainly not saying that we're going to be a Danaher, but it, it, it certainly is an aspirational organization for us. I think the, the, the, the short answer to your question of how you get better at, at doing deals and, and making sure that they're, they're ultimately successful for the organization is a by continuing to do them. So sort of like practice and learning from your mistakes and, and that, that first year we did in, in 2014 was, again, at the time we were a 15, $16 million company that was a eight, $9 million company that we acquired.
Speaker 4 00:14:30 We had one site outside of Philadelphia. Now we're, we're taking on a another branch with 30 employees outside the Springfield, Massachusetts area. So we're playing an away game. We're taking on all these new capabilities in, in manufacturing and fabrication, whereas historically we had just been sort of a, a value added distributor. And so that two or three year process, which fortunately it's far more expedited than than it was, it's far more expedited now than, than when it was back then. But the first thing that, that we have to do is we have to make sure that we have strong leadership in, in the acquired entity that, that we are, that we're taking over. And we, we went through two <laugh> general managers of, of that acquisition in 2014 before we found the person that that is with us now who has been with us for several years and, and has really provided some stability.
Speaker 4 00:15:20 I, I learned an important axiom of m and a and that first deal, and that is be careful about buying a company where the leader of that company wanted to buy the company themselves, <laugh>, they tend to not be wonderful partners once you, you show up. And that, that caused a lot of consternation on that, that first deal there. Somebody, somebody told me early on in this, that when you acquire a company, there's, you can sort of divide the team into a third, a third and a third who you're gonna have a third of the people who are just gonna be absolute rock stars. They can't wait to work for a new, bigger organization. You're gonna have sort of a third of the people in the middle who are worth investing in and can get there if you really do the right things and are right by them.
Speaker 4 00:15:58 And then you could have a third of the people who they just don't wanna, they don't wanna be part of a new environment. And I, I certainly wanna minimize that percentage, and I, I don't, we don't go into any deal expecting that's gonna be the case, but those ratios have held up, I would say over seven deals pretty, pretty accurately. And I think finding out essentially who's on board and who's not very early on is really gonna help you, you long-term and we run a very transparent organization. I mean, you've gotta show up, you've gotta be there. And I think the, the, the shorter we can make the transition pain of systems, processes people and really integrate that into our business as quickly as possible, it just sort of takes that, that uncertainty out for people. People don't like uncertainty and, and that's, and you only get, you only get so many chances to, to sort of say, all right guys, we're gonna reset.
Speaker 4 00:16:54 We're gonna try this again. And I think with that first, we, we maybe did that twice before we really got it right. And, and now I think we, we have a roadmap of that sort of real 30, 60, 90 day plan of, alright, let's get the data, let's get it into our system, let's launch the E R p, let's get to know these people, let's make sure we take care of the hr blocking and tackling the the 4 0 1 k, the the healthcare, make sure people get, feel like content and, and, and safe is, is an important thing. And then I think most, most people are gonna give you a shot. But what I think has changed in the last year or two, I mean we did four deals in, in in 2022 is 2023 now, is we're getting to a point now where we're really having dedicated staff and a dedicated team internally that this is what they're doing.
Speaker 4 00:17:45 Whereas before it was sort of like, all right, like I'm running point on this stuff and then I'm bringing in when our C F O is very involved, but we're, we're taking people who have day jobs themselves. And then we're saying, all right, we need you to spend a certain amount of your time on integration work. And now, because it's such becoming such a bigger part of our business, we have people who essentially that's all they're doing is we hired a chief operating officer at the beginning of this year. He comes from a much larger manufacturing background than, than I have a much, much more sophisticated process and operational environment. And he's just building out this project management office and we're just going through into businesses that we are acquiring and we're just, we're doing this, we're doing that, we're doing this, we're doing the E R P, we're doing the c r m, we're doing the website, and it's, it's, we have a lot more HR infrastructure now. So it's, it's, I think learning what works, having a plan from day one, executing as quickly as you possibly can, being upfront with the people, having them get to know you and then nothing success breeds a lot of success. And I think if you're able to have a good first year or two, then, then pretty quickly you, you're able to get people on board. Yeah.
Speaker 3 00:18:57 I'd love to hear a little bit about how you try and sort of figure out who's on board for the change upfront versus who isn't. Like is that just about putting in the time to really meet with everybody or is there something else that you guys are doing to really understand and assess talent and talent, the, the disposition and the orientation of the talent that that's part of the acquisition? What, what are you guys doing to just try and hunt for the true sentiment of the, the talent that you're acquiring?
Speaker 4 00:19:26 Yeah, and it's, it's, I guess that there's obviously a difference between like compliance and really enthusiasm. It's, it's sort of intangible. It's, it's, it, it can be, I'm sure that there are more sophisticated ways of, of doing this that as we continue to grow sort of the, the people management side of our business that I would, I would certainly wanna make a larger part of it, but I would just say at the end of the day, it's, it's, we, at this point, we have a pretty defined way of doing things the way that we want sales orders entered of purchase orders entered, we want our, our shipping and receiving done right? It's, and it's so that we, as we add these entities that we can sort of keep an eye on this stuff if processes are not followed, we cannot monitor a steadily growing business and make sure that we're deploying at the end of the day, we're limited resources in the right places.
Speaker 4 00:20:14 And so it's, it's that that attitude of this is the way we've done it, I don't wanna hear your input on doing this any better. And, and those are the people I feel like that we we have end up having a hard time with. And it's, it's not in any way, shape or form. I'm saying that we don't have a lot to learn from entities that we're acquiring far from it. I mean, we are not coming in here and saying that it's our way or the highway, but it's just once we do sort of define what, what the plan is, we, we need to, we need to execute on it. And it becomes pretty clear pretty quickly when you have five salespeople that you acquired and only two of them are entering opportunities in the C R M system when you, so that, that that's, it's, at the end of the day, it's, I would say it's participation and alignment, I would say is a good word, with, with our systems and our processes.
Speaker 4 00:21:05 And, and then we can, we can start that process of learning from each other because every deal we've done, I can look around an organization and some of our most talented people that, that we wouldn't be where we are just from an organic growth perspective. There's been somebody, or some group of people that have come along with every deal we've done that it's like, oh, wow, she came from that and like she's, she's a rock star for us on that one. She's only been with us for four years, but she's just really blossomed using a whole new series of tools and systems and, and processes. And, and I can, there isn't a single single deal we've done where there hasn't been somebody or some group of people that has joined our organization in some incredible capacity and has made us a, a much better company because of it.
Speaker 3 00:21:46 I'm trying to think about questions that we can, that we can dive into that if you were another family owned enterprise and you had decided to continue developing the business into the next generation and you wanted to continue growing organically and, and also inorganically, like what would be the, the really interesting blueprints and questions and answers that like another family owned organization would, would be interested in hearing as part of this conversation. And it makes me think a lot about what you said in terms of adding A A C O O to the business. It sounds like, I mean, a lot of times COOs can be a hundred percent focused on organic operations. It sounds like the c o o for now is very focused on executing post-transaction projects and, and post post-transaction integration. Oh. So I'd like to hear a little bit more about like how that, you mentioned a team, it sounds like you have a C O O, but it sounds like maybe there's other people that are on that team. Yeah, the C o O sounds like a somewhat more recent hire. Who was the first hire, Chris, that you made other than hiring yourself into the m and a seat and your C F o, like separate from you and the C F O who began to really spend the great majority or the entirety of their time on, on acquisition strategy for, for the Gallagher businesses?
Speaker 4 00:23:02 I'd say it's only really been in the last year or two that, that that person has been a dedicated person outside of our traditional management team. So I'm not, not trying to not not answer your question. It's the problem was that we were all taking a little bit of it and I was taking an inordinate, inordinate amount of it all myself,
Speaker 3 00:23:21 Right?
Speaker 4 00:23:22 And that was causing there to be, I think just a, a lack of focus on some of the day-to-day business. And fortunately, I have a great management team and, and every one of them has, has played a critical role in, in helping us integrate companies over the last couple years. But the, we also have day jobs, and so our ability to do more than one or two acquisitions a year is going to be predicated upon having these, these dedicated resources in place. And I think what we're finding as well is that integration for us is now starting before a deal is even closed. I mean, we, we know what the data sets are gonna look like, how we're gonna have to format them and, and as due diligence is, is going on, we're, we're working on some deals right now, and a year, two years ago, we wouldn't be thinking down the line of how this is gonna play a role in integration as we are right now, because we have the people who can, who can do that.
Speaker 4 00:24:19 But I I, I think, not to sort of flip the question back on you, but you were talking about if I'm another family owned business growing, not growing, what's interesting is we're mostly buying other family owned businesses. There's, there's this, there's this term that I always forget about it. It's, it's basically about how baby boomers, they're retiring now. And so, you know, and you see this Peter every day <laugh> in, in axial that there's a, it's like the, basically just, just demographically and, and generationally there's a lot of people who are between 65 and 70 years old who have five, 10, $20 million companies who that is retirement for them. And, and they need to sell that business to basically retire. They've put everything they can into the business and, and they need that exit plan to, to be able to, to retire and, and have the sort of the golden years that they want.
Speaker 4 00:25:08 And, and that, that describes a lot of people that whose businesses that we are buying. And I see a lot of patterns and trends in why some of these companies, they're great companies when they typically have a niche, but why some of these companies haven't, haven't become the 50, 70 $500 million companies. And what do you think, what I'm finding consistently and where I think that we're investing a lot of our time and effort in is, is there's a, there's a real lack of digitization. I mean there, these, these are companies that are, are, are really analog companies, not they're using like paper systems, but they, they haven't fully embraced sort of like the digital economy. They tend to not have very sophisticated online presences. They're very rarely involved in e-commerce content marketing and the like, and they, they tend to not look as inward for just a whole.
Speaker 4 00:26:00 Really the, the whole skillset of, of using data to optimize your business and and aligning your business around processes can allow you to get the data so that you can use it in a way to improve your business. Just that whole sort of like data ecosystem I think is, is something that we have built even before we, we got really into the m and a side of things. I think that was, that was something that, that I was very involved in driving our business as chief operating officer even before I came, became c e o is investing in that data infrastructure of our business. Not just it, but like true data analytics in our business. And it's an ongoing constant battle. But you know, the the way that we are integrating these companies is into a data architecture that is allowing us to better understand sort of like products that, that a company that we maybe don't have any experience with is selling, but put into a framework that we have of how we're organizing really our skews in our parts and to to, to allow us to, to really make sense of it. And, and I think better leverage the, the business that that they're already having. So it's kind of letting us see the farge of the trees a little bit more, but I, I'm consistently seeing an underinvestment in those areas of, of the companies that we're acquiring. And, and that's how we're sort of finding that that one plus one can equal five for us down the road. How,
Speaker 3 00:27:22 How does it get to five, like what what is the data investment that you have made in Gallagher that you can convincingly say has created very powerful r o i for the way the business runs the top line potential of a business line? Like I understand data is important and so does everybody else, but what, what are some concrete examples of how you guys have said we need to invest in data in this capacity and in this aspect of our business, and you went and did it and then six to 24 months later you were really realizing the benefit of that. Like what, what are some examples?
Speaker 4 00:27:57 Yeah, so the, I'd say early on, and this was really the first area that we focused on, was more on the front end of our business, sort of on the sales and marketing. And that was, I've always been a, a true c r m evangelist and every sales and and marketing director that I've, I've ever hired, that's sort of been the <laugh> the price of admission is to, to truly see the power of, of C R M and customer relationship management. It's something that a lot of people talk about and a lot of people do poorly, but if you are able to have a true window and lens into the interactions that our sales team is having with their customers, we're gonna be able to, to uncover a whole range of opportunities that as individual people we're just missing because we're constrained by time. So
Speaker 3 00:28:41 What, what are some of those opportunities? What happens when you do c r m really, really well?
Speaker 4 00:28:46 What we understood is that we're always gonna have a couple of very high performing salespeople and they're sort of unicorns and they just, sales talent is, is very <laugh> it's very difficult to predict, but you know, when you have that, that top salesperson. But I think what, what's what c r m and the, the analytics and the data showed us is that we had so many smaller customers and opportunities that weren't getting the mind share of the sort of the, the big account managers that want to go out and find those elephants that we created a whole new department in our business of really business development representatives that they're more on salary, they have a different commission structure, but by monetizing a lot of the, the marketing collateral and the inbound activity, and this is the whole other side of it is, is really the, the content marketing side of our, of our business of generating content, having a, a robust digital ecosystem, building your email lists, being proactive and outbound with, with content and having the tools in place to see who's engaging, interacting with your content and having these, these business development people proactively reaching out to them.
Speaker 4 00:30:01 You know, and maybe it's a $500 opportunity initially, maybe it's a $5,000 opportunity, but that's not gonna get the, you send that to a, an account manager who's looking for six figure deals, they're, it's not gonna get their attention. But if you have a a stable of hungry business development reps, they're gonna sink their teeth into that. And, and that's been one of the biggest changes in our business. I mean, we have, we have eight of those people in our company now, and all they're doing is looking at who's downloading case studies, who's looking at videos and finding intentional ways to, to reach out to those people. And, and sometimes those people do become six figure customers. But it took that, that one, that one interaction outta the gate of somebody paying attention of at the, at the long end of a series of interactions that have been tagged and documented in the C R M that a human being is actually picking up and, and and engaging with that person.
Speaker 4 00:30:51 And, and we've, we've generated tremendous scale in in, in that area as we've grown. And, and, and I've stepped sort of out of that side of our business a little bit more to more of the backend of the data and how we're, how we're really organizing our products. And this is, this is gonna be a constant ongoing initiative and, and strategy in our business. But as we, as we get more diverse and we, we sell different types of products, I see the value just continuing to steadily increase. And, and that is that figuring out where our products end up in sort of the manufacturing ecosystem. I mean, we, we're, we're primarily an o e M driven business. I mean we're supplying products to OEMs and, but we also do have some, some maintenance and repair end user business as well. But it is, for a long time we allowed something as simple as part number creation to be just done by customer service reps, just Johnny or Susie.
Speaker 4 00:31:47 They basically called it whatever they wanted. They described it, whatever they wanted. And that led to a just a whole mess of our, so we call our item master of, of how are we organizing our, our data and by putting some real rigid sort of disciplines in there, we have a much better sense of what we're selling, who we're selling it to and what the end products that our pro, what the end equipment that our product is going into. And it has opened up all these doors as we acquire entities and we see all this crossover. The semiconductor business is a perfect example for us because we, we have tremendous penetration and semiconductor business from a, a seal perspective both in the o e M and and in the maintenance work and user side. But now we've bought some dedicated semiconductor distributors who are selling other products than, than seals and gaskets.
Speaker 4 00:32:39 They're selling vacuum pumps, they're selling flanges and fittings. And by having the, the part and the customer data organized in such a a, a regimented way over here, we're able to overlay these new cust, these new customers and these new products over top of it and see opportunities to engage with people that we would've never had if we did not have that, that data infrastructure in place. And as we integrate new parts and new customers into the overall item master, it just really becomes a force multiplier. And, and it's an area that I, I see us continue to invest more and more and more and is again, using a, a, a far overused buzzword, but you think about these quote unquote AI platforms just sort of processing power and, and not relying just necessarily on a, a human being to, to plot these, these connections but allowing algorithms and, and programs that we're developing in-house to, to be able to spot some of these patterns. That's, that's really exciting to, to us in the future managing a, a growing and diversified business. But at the end of the day we're talking to a lot of the same customers.
Speaker 3 00:33:43 Those are really good examples. I appreciate you getting into those details. 'cause it's, it's, I think everybody hears a lot about data, but I think some people find themselves like investing a lot in data and then not necessarily sort of understanding where the opportunities for the R o I to really to really come from. And I think people can get some fatigue from, from continuing to invest in it. 'cause it just sort of feels like more and more overhead, more and more stuff to manage more and more things that need to get normalized and organized and recorded. And it's like unclear as to sort of, to what end all of this is, is being done. So it's, it's helpful to just complete the, the loop with some specific examples. I totally buy it on the c r m side actually, and the territory opportunities with small customers and stuff like that.
Speaker 3 00:34:27 We don't have all of your day. And so I want to spend a little bit more time on acquisitions and I'm really interested in talking to you about just how Gallagher tries to win in the acquisition process with, with the selling firm. Like what is the, how do you guys try to execute a winning motion for Gallagher as the partner of choice for a seller who who maybe finds themself in a situation where, where they have choice, right? Where there's, there's an alternative, right? There's, there's an alternative partner, whether it's strategic partner, whether it's financial partner, but you know, there are situations where you can be the only one at the table, but there's a lot of times when you're pursuing really good assets that are being sold by a professional m and a advisor where there's, there's some credible con conversations happening with multiple parties at the end of the day. It'd be really interesting just to hear a little bit about how you and you guys think about winning the deals that that matter to you. And I'm also interested specifically just there's, there's obviously the narrative with the financial buyer that they're a financial buyer and they're just gonna sort of lever up your business and sell it three years later. And and that's kind of like the scare tactic for, for, and then the financial buyer, they never
Speaker 4 00:35:43 Made that case. Yeah,
Speaker 3 00:35:44 Exactly. Right. And then, and then, and a financial buyer will rebut, will rebut that in, in, in, in a variety of ways, but one way that they'll rebut it is they'll, they'll say that once you sell to a strategic buyer, your name is coming off the door, you're just getting rolled into and sort of incorporated into this broader entity. And there there's no, there's no ability for your business to sort of endure in, in a lasting independent context. And so you don't necessarily need to address those two, but I just like those are some of the narratives that are out there in, in the market. And I'm just curious sort of how, how you guys go to market when you're excited about a business that, that you sourced.
Speaker 4 00:36:19 Yeah, it's, I mean, if we could talk about that all afternoon, it's, it's a, a wide and varied, varied topic, but it's, it's an important topic. I'd say a couple of things, deal flow, we take a very similar approach to as we do with sales, right? And it's if we have enough opportunities coming into the top end of our funnel of our deal flow, then that's gonna give us a predictable sort of gating process where if we're talking to enough people, if we're using platforms like Axial to source enough deals, if we're networking in our industries of which are growing and talking to people that we're not gonna, we're gonna have more freedom to do the deal that that, that we will. So it starts with, it starts with having enough prospecting so that you, you don't feel like you have to do a deal because it's the only deal that's in front of you.
Speaker 4 00:37:03 So I, I think it first and foremost starts there. And I think that's, that's something that I, I do feel that I've, I've brought to our business because hither two, we had just, we had called the same four or five companies every year and it was like, you guys wanna sell? Nope. All right. Talk to you, talk to you in six months. And that's, that's a recipe for stagnation. The PE side of things, the financial buyer in our business is, is very real. I would say we've, we've mostly done deals in the five to $10 million sort of sales arena and for a, a PE or, or for a platform that can be a rollup size for them, but it's, it's not really gonna be a sort of a platform business for them. We're more the size of a platform business that they won. But as we continue to migrate up market and the deals that we're looking at, we are gonna butt up against more financial buyers as, as, as competition.
Speaker 4 00:37:55 And it's, it's, we have lost out on deals to, to financial buyers. And I wanna say that it, it hasn't happened, but it's something that will happen more and more as the size of our deals increases. So it's, it's something that we're gonna need to have a good answer for. Why, why Gallagher, why us, why not x, y, z firm? And what I have said and and what I would continue to say is, is the following a and, and listen, financial co companies have done this a lot. They have a lot of experience in this, in this arena. But so do we. So we, we didn't just fall off the bread truck yesterday. We've done a lot of deals, we've done a lot of successful deals, and so we have a track record and that, and that matters. I find that especially with people with family companies, one of the, the biggest and everybody wants to get a good, a good price for their company.
Speaker 4 00:38:40 I'm not saying that the, the financial side of things is not critical here, but I I do really feel in, in every deal we've done, it's this, are you gonna take care of our people? And that is obviously, there's no guarantees there. I mean, you can put certain agreements in place and the like, but I do feel like there's a story that we can tell not only sitting across from a, a potential seller, but but backed up with, with actual evidence and track record that, that we wholeheartedly encourage a seller to talk to people that we've bought their companies from in the past and people who transitioned from an owner of business that actually worked for us. And we, we have that in, in more than one example of somebody who has sold their business to us and works for us in some capacity. And I think that to have those relationships be as successful as they are today, five years after you bought that person's company, I think that speaks to, to our organization, how we treat people.
Speaker 4 00:39:35 And so there, there, there certainly is, is is that side of things that how are you gonna, how are you gonna treat, treat our people? But it it every, I wish there was a single example of what, what deals come down to, but I just think it's, it's having enough deals that you're, that you're pursuing at different stages and so that, that you don't, not one dynamic is, is going to get in the way of our ability to continue to grow our business through acquisition. And so it's that we're not reliant on, I know sometimes you, you fall in love with a deal and it's like, oh, I gotta have this, I gotta have this company. And then, you know what, four months later something else comes and we're looking at a deal right now. It's a great deal. I love it. I'm really super excited about it.
Speaker 4 00:40:15 And somebody sent, sent something across to me a couple weeks ago and I was like, oh wow, like that looks amazing. I'd love, but you know, we can't do, we can't do both at this point. So it's, we're we're further along with the one that we're working on. And so it's just like, but it was, it was like, wow, that doesn't work out. This could be a wonderful, wonderful fallback. So I just think it's, it's about having, working on enough in front of you because enough's gonna fall apart for a variety of reasons. And maybe that was a long-winded way of answering your question. I don't know if I did
Speaker 3 00:40:43 <laugh>. No, I mean I, I think it's a good answer, right? I mean, I think when you have a lot of compelling opportunities coming into the top of the funnel, it puts you in a really different position to, you don't feel as devastated when a deal falls through. And same thing as a salesperson who has a huge amount of pipeline versus a salesperson who's hanging their hat on, on one big deal closing in order to, in order to make their number. So that makes sense. What about just in terms of staffing, the sourcing effort, like you mentioned you have a president or a C O O who's doing a lot of the work right now, at least related to post acquisition integration work. Yeah. How do you guys staff sourcing? If you want a lot of pipeline, you need to dedicate a lot of time to building a lot of pipeline. And, and so how are you guys triaging that and who's involved other than you? And again, if you were advising a family owned business that's trying to go from crawling in the world of acquisitions to, to walking or, or jogging in the world of, of acquisitions, like how would you advise them a little bit on, on sourcing and staffing against it?
Speaker 4 00:41:45 Yeah. Uh, again, uh, good question. Uh, I'd say we, we have sort of a, a hybrid model. I mean, we've sourced a lot of deals just from word of mouth in our industry and just personal connections and that's great. And I never, I never want to lose that side of things because we close those deals at a, at a sort of a high, high success rate and obviously it doesn't cost us anything. Do
Speaker 3 00:42:08 Those come to you directly? Do they come in through business unit leaders? Like where, where do those tend to come from? Like if you wanted to increase the amount of kind of word of mouth that you guys were organically getting, how would you, how would you turn that flywheel faster?
Speaker 4 00:42:22 So, I mean, the first thing that you can do is you can just publicize the fact that you're trying to do deals. We, we do a lot of blog content about deals that we've done. Um, a lot of our competitors are, are, are receiving that information. It's, it's very clear in our industries and in our distribution networks, which I have great relationships with. I I some ways don't even look at some of these companies as competitors, even though they are, they know that that, that we're trying to do this. So we have had more than a handful of deals just be straight up, Hey, we know you're trying to buy companies, I wanna sell my company. That's amazing. It doesn't happen every day though. And that was where, and and it's, it's tough to predictably close deals like that. And that was where I think Peter Axio really came into the equation for us as, as an incredible network of, of you can look at as many deals every day as you want and, and yeah, maybe you have to kiss a couple of frogs to, to get to, to where you wanna get to.
Speaker 3 00:43:16 Gotta kiss a lot of frogs in m and a. It's,
Speaker 4 00:43:18 Yeah. And that's, and that's, that's not in any way, sh a shot at at axial <laugh> platform is, uh,
Speaker 3 00:43:25 Is
Speaker 4 00:43:25 Is wonderful. It's just that you, you wanna take an expansive view in sort of how you're setting up your, your m and a Tinder profile there to be able to make sure that the ones that you do wanna do come across. So I, I'd always rather look at something and, and say no, than, than, than have missed something, right? The question that, that we're facing on the sourcing side, and I, I don't think we're quite there yet. Maybe we'll be there in in another year or two, but it's, it's much like we're professionalizing the, the integration side of our business with, with dedicated resource and personnel. It's when do you bring that resource in-house or when do you, when do you start to outlay? I mean, I've had more than a handful of deal sourcing firms, deal sourcing professionals come to us and, and pitch us on being on retainer and sort of being our eyes and ears out there in, in the marketplace. What
Speaker 3 00:44:15 About C R M for deals? Do you have a C R M that's focused on only your deal prospects? I know you obviously are a big c r m guy on the sales side. Have you done it on the deal side yet?
Speaker 4 00:44:24 You know, I, I have not. And I, I don't want you to think that that, uh, in any way inhibits my enthusiasm for c m.
Speaker 3 00:44:30 It doesn't. It's,
Speaker 4 00:44:32 No, it's, it's, it's a good point and hey, I, I would love to get to a point where we're looking at like so many deals a month that like, I need some sort of a c m or an app to keep track of them. I, I mean, at this point I'm just not quite there. And, and even like our, our portal and axial is a great way to manage things that, that we have. It's been, we closed a deal with you guys at the end of last year, and that was the second of two deals that we did. We don't have anything really in the pipeline with you currently, but I continue to, to get those emails and log in and I think they're, we bought four companies last year and I didn't expect to be coming back and jumping into the, you know, the deep end of the pool quite as quickly as we are right now because you, you do go through these obvious, you go through these cycles and you, we are leveraging our business and using debt as a portion for some of these deals. It's, it's, they're not all cash deals.
Speaker 3 00:45:25 Are you back in the market faster than, than you thought because you integrated those deals more quickly than you anticipated? Or are you back in the market more quickly than you thought because inbound opportunities have arrived on your door that are too interesting to, to potentially just ignore? It's
Speaker 4 00:45:42 The latter. Okay. It's, it's, it's the, it's, we're just working on a couple things right now that we grew our business outside of the fluid seal sector into some ancillary industries, and we created dedicated operating units around those, those entities including a, a parent holding company. And I started our conversation saying that there were, there were seven or eight sort of end technical industrial product markets that we had identified besides fluid seals that we liked. And we ended up getting into two or three of them. And so now we're really looking sort of wider and deeper in those three operating segments. It could have been, it could have been Marine, it could have been aerospace. Instead it was vacuum semiconductor. And we have a fluid handling group, which we have a pump company and um, a company in the Permian Basin that is focused on oil and gas, which is a really exciting place to be these days.
Speaker 4 00:46:36 And it just, things have popped up that are really gonna bolster those entities that I felt was worth jumping back into there a little bit quickly. Quickly. And I, I didn't have the interest in going outside of sort of our current, our current portfolio. Maybe someday I will, but it just as you get more specialized, this whole strategy was, was born out of, we can't just look at seal companies, we need to look at other companies because there's only so many seal companies. Alright, that's great. We looked outside, we closed, we acquired, but you can't just keep jumping into new spaces and new spaces and new spaces. And so
Speaker 3 00:47:14 Right. You've, you've, so you're saying you've, you've widened yourself outside of fluid and seals now. Yeah. You've, you've achieved that and now it's time to go deeper in those, those categories as opposed to do further widening for, for the time. Exactly.
Speaker 4 00:47:27 Yeah. And a couple of things popped up in those spaces that it was like, Ooh, wow. Like that's, that's just kind of too good to to pass over.
Speaker 3 00:47:35 Right. We have time for maybe one final topic. I think it's an interesting one to circle back to, which is just capital allocation. The business started out, or not started out, but the business prior to you guys sort of making the, the turn to do a lot of m and a business in many ways, and the shareholder group obviously being very influential here, thought about the success of the business based upon the dividend distribution, right? The, the size of the, of the check that was distributed at the end of the year to the respective shareholders and the idea of retaining earnings, building cash to make acquisitions. The idea of growing equity value through good acquisitions was abstract at first. And now you've made seven or eight acquisitions in a period of as many years. There's no question that the revenue in EBITDA of the business is in a completely different galaxy.
Speaker 3 00:48:27 And so what, what I'm interested in, in just diving into for the last topic is just now what is the conversation that you want to have with shareholders? What is the way in which you and the share respective shareholders and board members think about free cash flow and its uses? Do you have a process or an approach by which you sort of gather the board and the shareholders on an annual basis or otherwise and say, Hey, this is how we're planning to sort of retain cash for growth and acquisitions and this is the amount that we're, you know, planning to distribute. Just how has the capital allocation process evolved from where it was seven years ago where it was essentially dividend everything out to now? You've clearly made a lot of changes there. Like how does the family and the shareholder base think about it now and where are you trying to get to next?
Speaker 4 00:49:20 Yeah. Well, I mean it's, there's still definitely, because we, we don't really have any liquidity on our business. It, it's, it still is a, there's still definitely a focus on, on distributions and sort of what, what have you done for me lately? And, and I think as, as I mentioned, what what we're proud about is we, while it's a, a lower percentage of the overall profits are being distributed, we have eclipsed what we could have possibly done had we done nothing. So we've, we've, we've made people whole and we're, we're able without sacrificing that to continue to, to, to grow the business through, through m and a. I think what we've, what we've done to manage these conversations and then set these expectations is we've had to develop sort of a, a vocabulary and, and we've had to do some education on, with the shareholder group that has a lot of different backgrounds, not all business professionals.
Speaker 4 00:50:16 And we have, at the end of the day, a a central forecasting model that, that I've built, but we've had input from our accounting firm and our financial partners and, and we use this model for everything. I mean, when I'm sitting in front of the bank and I'm saying, all right, we're gonna buy this company and we're gonna need to borrow this much money from you, and here's, here's gonna be the impact on, on the free cash flow, on the taxes, on the goodwill and amortization on interest expense. I mean, we're really able to, to model these out, these transactions out. We take very, very, very conservative organic growth metrics that we put in this model because we wanna, we don't wanna need to rely on double digit organic growth year in, year out to sort of make ends meet when it happens, which it has happened more often than it's not.
Speaker 4 00:51:07 It makes things obviously a lot better and a lot easier, <laugh>. So I, I would say what we've done is we have developed a, a model that a at this point, the shareholder group is familiar with, our financial partners are familiar with. I'm obviously familiar with being the person who's created it and the credibility that we're able to have with all of these different stakeholders by actually looking and saying, Hey, I sat in front of you this time last year and we forecasted that 2023 was gonna look like this. Alright, we, so we just had our shareholders meeting last week, and I'm able to sit in front of 'em and say, we forecasted this. Here's where actually how far ahead of that we are, and here's why I think it's a good idea for us to come and do X, Y, and Z and here's what the impact is gonna be.
Speaker 4 00:51:49 And I don't have a crystal ball and something like a covid or some sort of tail risk event could come in and, and take a whole bunch of our assumptions and throw 'em out the window. But I do feel that we've been able to use these models to, to forecast effectively to demonstrate to a shareholder group what their returns are gonna look like over the next couple of years. And by meeting those expectations, and a lot of people see, they see these big numbers over here and it's like, well, that's great, but we kind of need some of that to continue to grow this over here so that your number can get here. And, and that I give, I give our ownership group a tremendous amount of, of respect for sticking with us in that and for, for playing the long game here and ultimately having gotten to a, a, a place that we, we would've never gotten to if we just continued to distribute out 80% of our, of our profits every year. So that's, that's, that's really been really been the, the key part there, I think. And, and there's a ton of communication and there's a ton of handholding and a lot of conversations that I'm having with, with the shareholder group. But how
Speaker 3 00:52:50 Often do you communicate with the shareholder group? Sounds like you have an annual meeting, but when else do you guys,
Speaker 4 00:52:56 Yeah, I mean these are, listen, these are my, these are my aunts and uncles, this is my dad, this is my cousins. I mean, these are people I I grew up with. I would say it, it ebbs and flows.
Speaker 3 00:53:07 Are you guys talking about this at the, the Eagles tailgate in the, in the fall or is it a little bit more like of a, of a business setting that this stuff happens in? I mean, it sounds like you've got so many different people. It's a big family, right? So you've got a lot of different opportunities to have these conversations. Sounds like a really big part of the job.
Speaker 4 00:53:24 Yeah, and and it's my grandfather who, who started this business and, and structured a lot of the, the transition of, of his equity to his four kids. He did things in a certain way. And I, I think what what us and and our advisors are, are prefacing to, to we call Jen two, sort of like my dad and his siblings, is there's not a singular way of doing this. Just because your dad gave his equity to you doesn't mean you have to give your equity to your kids. I mean, if you want them to buy into this, like you have that right, there's gonna be implications for how we continue to grow the business in the for, but my point is that as the, the, the business transitions from four owners to nine owners to my kids' generation, which I don't know how many there'll be, we're still having kids, is there's not a one size fits all approach.
Speaker 4 00:54:12 And, and we need to allow for, for flexibility in the business moving forward. And, and at this point, I don't believe that is gonna involve selling equity in the business. I don't believe that's gonna involve selling the business, but at the end of the day, we're trying to allow people to realize gains in the value of their equity that doesn't just involve paying dividends. And that's, that's, again, that's, that's a, a needle to thread because you have different people who are in different situations financially, they're in different situations in life. They have different numbers of kids and different needs and interests and it's, and, and different levels of, of just literacy, about, about what a business is supposed to do and, and what their, what their role in it should be. And it's, it can be a challenge. I'm not gonna lie <laugh>, it can be a real challenge, but I just feel that by being as upfront and honest with where we see things in the next three to five years, and by delivering on those year in and year out, I find that I've been given a fair amount of credibility and leash to do what I feel is, is in the best interest of the business.
Speaker 4 00:55:20 And so far it's seems to be working
Speaker 3 00:55:23 Outside of just the, like the school of hard knocks and just sort of learning as you've gone from starting out as an intern in the warehouse when you were a high schooler or college intern to now to now running the company. I mean, what have been the most helpful sources of influence or of, on you, who have you learned the most from outside of just continuing to swing the bat at the plate and get better each time, whether it's acquisitions or hiring or management? I mean, what have been important influences on you as a, as you've learned how to be the c e o of a growing family owned business with a lot of shareholders and now a lot of acquisitions, like what, what have you, where have you gone to learn?
Speaker 4 00:56:02 So I, I've done a little bit of everything and I, I, I mentioned that we did for a period of time had had several outside board members who themselves were incredibly accomplished professionals. People that at the time I was shocked, why would you wanna come and be on our board? And, and they did it and were were incredible resources to me as, as a new c e o. So that was a tremendous group of people and I'm incredibly grateful for, for the, the mentorship that they, that they offered me. I have participated at various times in sort of like peer groups, c e o groups. I've had good experiences, not so good experiences. I've
Speaker 3 00:56:39 Had the same, yeah,
Speaker 4 00:56:40 The school of, I would say mostly it's kind of in school of hard knocks a little bit. And, and I, I, I feel that there's, there's definitely a reason why a lot of companies like ours sort of tap out and, and that is be, and tap out in terms of growth taps out in terms of size, because I think there's, there's only so big a business that a company can be with having somebody sitting in a position like me influencing every event. And at some point you have to, like my, I see my role increasingly is about identifying, recruiting, and finding talented people to come onto our team who can do things better than I can do them. And when you start hiring people who are better and smarter than you to do things and you let them do their job, then you're amazed at what opens up in front of you.
Speaker 4 00:57:27 And so it's like you have to let go a little bit. And that's hard for some people. It's, it's, I think it's very hard for founders in particular, which I am not a founder. I would never claim to be a founder of a business. But I, I think that that's, that's been the biggest element for me is, is being able to seed authority and seed more intellectual horsepower and, and strategy development in our business to, to just and, and listen. The people have to be good. I mean, it's, it's, you can, if they're not good people, then, then it's not a good decision. But if they're the right people, then you, there's no limit to I think where, where you can take a business and I can have a <laugh> have a new child with my wife and spend a couple of weeks really focused on that and yeah, being involved here or there, but the business is still continuing to me it's objectives and I don't need to be involved in every single key decision day to day. And, and there's something incredibly liberating and, and, and empowering about that
Speaker 3 00:58:23 Perfect place to leave it. I really learned a ton, and it's great to get to know at the Gallagher business a little bit more from the inside out. Thank you so much for giving us all of all the time and sharing so much about the specifics on, on how you've built the business, continued success. Chris, it's really impressive to hear about it. Thanks for making the time.
Speaker 4 00:58:42 Thanks Peter. And we're grateful to be a part of the actual network and I look forward to continue to work with you guys. Sounds
Speaker 3 00:58:47 Great.
Speaker 1 00:58:54 If you enjoyed this episode, check out axial.com. There you'll find every episode of this podcast as well as our recorded axial member roundtables, some downloadable tools for deal makers axials 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
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