[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.
[00:01:00] Speaker B: Hey everybody, this is Peter Lehrman. Welcome back to Masters in Small Business M and A. I am super excited to have Kyle Tucker on the show today. I've gotten to know Kyle over the last couple of years. We've had a chance to meet in New York a couple of times and we're really excited to dive into Tucker's Farm. Kyle, it's great to have you on the program. Thanks for making time with me.
[00:01:20] Speaker C: Yeah, excited to be here.
[00:01:22] Speaker B: As we discussed, I want to understand the light bulb moments for Tucker's Farm, what you're doing and how you got there. I don't know the whole Kyle Tucker story all that well yet. All I know is you spent multiple years in private equity at Apollo, which is about top of the heap in terms of big cap private equity. Then you were at Viking, which is a world class hedge fund that was started by one of the top investors at Tiger, went out on his own and built an amazing institution.
And then somehow you decided to leave that path and create Tucker's Farm and buy lots of businesses in the lower middle market and get back to goat farming. Take me through it. Do you remember some of the moments when you started to think about this change in direction? Love to just start there and have you take us through it.
[00:02:08] Speaker C: So I can answer that in a bunch of different ways, but my real light bulb moment was when I think I was like 13 or pretty young. I know this is cliche to say, but I came across Buffett somehow. I want to say that's when Snowball came out, but it was the first time I became aware of his story.
He was like this Venn diagram of super, super successful in kind of like One bucket and then a good guy. And that was a new archetype. I thought that you had to be like a corporate fat cat, like a bad dude. I think there was something else about his story, that he was basically like a professional opportunist playing this game of chess or being able to judge risk, reward. And I think there was something that was like intuitively appealing about that to me versus maybe the other versions of extreme success, Bill Gates or something where that is a point in time. I don't say Lucky because he's such a remarkable guy, but there's not as many, like lessons. He didn't do it in this like repeatable, methodical way. We didn't create this mountain in this understandable, clear path. So I was really into Buffett early on. I kind of hate to say that because it's such a popular thing to say, but it was true for me at that time. I was really into this concept of value investing, this intellectual framework of, hey, I can buy a dollar for 50 cents. That really appealed to me. I thought the latest version of that was these hedge funds. So that was early green light. Third point, Pershing Square, Act 1.
My understanding, someone told me that the way you get into one of those places is you start in private equity and then before that you start in banking. So there's like this pipeline that ends up there. Now, I don't know if I knew what private equity was or investment banking, but at some point that path sort of crystallized, like, oh, I need to go do that thing. I'm not from a traditional background. I'm born and raised in Bermuda, but I was very focused on getting into that pipeline. How do I accumulate prestige early on in my career? And so I started my career banking, worked like hell to get into the best private equity firm I could get into. So I go from banking to Apollo. In banking, that was another light bulb moment in that even preparing for the private equity interviews, doing an LBO model again and again and again in all these different forms. It was a 50 minute paper LBO or it's a 3 hour full, whatever, 10 tab, whatever. I think at that moment I felt like I really understood like accounting and the financials and how they all work together, which is ironic because I did multiple accounting classes in college. But that was another moment where like, oh, I think I get this. It's like basically a math equation. And there's something about an LBO that's mathematically elegant. It's basically leverage spread math. And so I go to Apollo and Apollo's this big asset manager, hundreds of billions of AUM and I think at this point thousands of employees. But the private equity team, which was its core business or is its core business, much smaller group, super broad mandate. So across industries, geographies, across capital structure, they can do buyout distress for control, structured equity, structured credit, you name it, they can do it. But their basic constraints or parameters that they're working with is it needs to be big and it needs to be cheap. So they're trying to Deploy billion or 2 of equity and let's say pay less than 8 times, 8 times cash flow. There's something about that strategy that was super appealing to me. I really enjoyed it. I love Apollo for many reasons, but I really enjoyed the elegance of that math. In these large institutions. At some point for me, the wheels would just come off. I just wasn't into it. I mean, I could fake it for a couple years or whatever, but ultimately I have the words now really. I was an entrepreneur, but at the time I was just more man. I know that this isn't like a long term path, but at Apollo, typically you become a partner there or you leave and you go into a hedge fund. Those are kind of like the two routes for your Apollo private equity associate. But there was this one guy who had left to roll up Burger King. His name's Alex Loan and his story totally hit me or vaguely understood the math weight. He can buy Burger Kings for, let's say five, six times with three turns of leverage. And there's something very intrinsically appealing about that path. And then I heard about Alex's younger brother Jake Sloan and his partner Frank Zhang, who's also an Apollo guy, so very much part of the Apollo ecosystem. And they were rolling up vet clinics and it was kind of like a better version of the math. This is called mid teens. And they were buying vet clinics for four or five times and three turns of leverage and the platform will trade for 15 times and the category as a whole would grow at high single digits, 9, 10%. I was just like, that's remarkable. I don't need to do that. Lbl. Why isn't everybody in this bullpen quitting to go do that right now? I remember thinking like, oh man, these businesses became multi hundred million dollar enterprise value businesses overnight. And I remember thinking like, that's a version of success that I can emulate. Take Mark Zuckerberg or something with apps and software. And that's Chinese to me. I don't know the first thing about that. This was scrappiness and hustle and creativity and deal math and all things that I felt I'm pretty good at that. I knew I didn't want to be a long term part of an institution. I saw this version of private equity that was just mathematically so compelling. And also I feel like I could execute. And I totally understood.
[00:07:04] Speaker B: Why did you move to Viking instead of just leave the bullpen at Apollo and get underway? Explain that chapter.
[00:07:10] Speaker C: So I was like, all right, I'm going to quit. I'm going to go do this thing. One thing about Apollo private equity is you get all these super fancy hedge funds knocking on your door.
And I'm not from like a prestigious background at all. So I worked so hard to get into like the burning hot core of Wall street.
And I just was like, maybe I'll take the hedge fund option. I'll go become a hedge fund guy.
Maybe I make a bunch of money and I just become like a hedge fund guy. There's worse things than that. And if I get fired, which was the knock against hedge funds, you can go to Tiger or Viking or whatever. What if it doesn't work out? Doesn't have the inherent stability of working at a private equity firm. And I didn't give shit about that because I was going to quit anyway. So I was like, all right, well, if I got fired, then whatever, I'll just go do my thing that I was originally planning on doing. I took basically two interviews. The first one was bow post, I didn't get it. And then the second one was Viking, totally different. Was not looking for a certain type of investment style. I basically wanted prestige, high paying. So I had that volatility of perhaps that upside. And Viking is an awesome place. But I immediately realized that Viking is a very hedge fundy. Hedge funds, what's the quarter? What's consensus? What's this KPI where this stock will beat or miss 20 longs, 20 shorts, that sort of thing. Not like Buffett Cash flow investing. So within like a year I went to my portfolio manager who's this awesome guy. I was just like, this isn't for me. His family offset ended up being a big investor of ours. And then I left and started this whole journey.
[00:08:33] Speaker B: I'd love to create a bit of a platform for you to talk about Tucker's Farm, because some people think it's a farm, some people think it's a family office. It's neither. I want to give you the floor there, but is that when you moved home to Bermuda?
[00:08:46] Speaker C: My first two platforms were not Part of Tucker's farm. I did them with a 5050 code GP.
[00:08:50] Speaker B: Let's get into Tucker's farm. Now what is Tucker's farm? What is it today? And to what extent is that different from how it began?
[00:08:57] Speaker C: I described as a holding vehicle? It's not a farm. My dad's a small scale dairy farmer so he's got 15 goats. But that means like $50,000 of revenue and $70,000 of expenses. Some people think that he runs this dairy conglomerate which is not the case. My parents are the equivalent of wealthy dentists. He's a pippy, he's an artisanal guy and I've always loved his business that he has. It doesn't really make any money, it loses money, but everybody in Bermuda knows about it and he's a cheesemaker. So when I, I was contemplating what brand do I want to be as I build my investment firm, the folksy Midwest compounders were a lot more appealing to me than starting Raptor, Lane Capital Management, Berkshire, Koch Industries, those sorts of things which were kind of in corporate form versus fund form.
I view those as true MOIC or compounding stories. Hey, we compounded at 20% for 50 years versus a traditional private equity vehicle where it's yeah, we've got like a 40% gross IRR but it's maybe a two bagger net if you're lucky. So I like the corporate forms versus kind of attritional layering funds and being in midtown and doing PPM roll ups. So there's something like aesthetic about that. So I used my dad's little goat dairy or brand. I said okay, this is going to be the starting ember that we're going to build from that. Structurally there's an unwieldy confederation of different vehicles holding companies. It's not like one corporate Chen mark where I believe they have one C Corp and then everything is within that C Corp. That's why I say holding vehicles just like a little bit more squishy.
[00:10:26] Speaker B: What is it designed to do? Just tell us a little bit about the acquisition efforts that it prioritizes. Obviously this is masters in small business M and A so it's 100% focused on lower middle market typically sub $100 million transactions all the way down into the single digit millions. So you wouldn't be on the show if you weren't active in that area. But give us some more details on where you're spending time, what kinds of acquisitions you're hoping to make and we'll get into some examples as Well, I.
[00:10:52] Speaker C: Think of our product, if you will, as long duration compounding or MOIC oriented private equity. You give me a dollar, I'm trying to turn that into 10, 20, 50, $100 depending on the time period. All we do is our lower middle market transaction, so call it sub $50 million of enterprise value and typically our average equity check to a given holding company which will target a specific theme or industry or whatever is let's say 20 or 30 million dollars. There's nothing like intrinsically appealing about deploying smaller amounts of money. It's just that if I have to deploy a hundred million dollars, I can't create the same. Honestly, return size is the strategy. The bigger you get, the harder it is to turn a billion dollars into 10 billion than it is to turn, let's say $20 million into 200 million. Both 10 X's, but it's different. So we're very focused on taking advantage of the math of the lower middle market. The other characteristic is just duration. Right? We're trying to compound and have a kind of a high MO outcome versus a pretty underwhelming traditional private equity result. Our core thing is rollups, buy builds, aggregations, whatever you want to call them, highly active M and A strategies. We are open minded to non rollups. We're doing more of that thing. There's a whole story there. But traditionally it's what I call rollups.
[00:12:02] Speaker B: Can we talk a little bit about maybe duration and just what you mean by that and how you set up the various entities and vehicles under Tucker's farm to lean into duration.
[00:12:14] Speaker C: First structure was permanent. Second structure was permanent. Third one I want to say was permanent. The fourth one was permanent. The fifth one was 15 years. And then the sixth one, I'll just say not permanent. A traditional private equity structure is actually pretty long to begin with. Like yeah, five year best period, five year harvest period, some extensions.
So all in 10, 15 years. Let's say on one end of the spectrum you have like a true holding company where you have shares and there's no sort of redemption or call provision or you're stuck in this thing from an LP's perspective. And then the other end of the spectrum you have the hedge fund with like two quarter mockup. We are very much on that other end of the spectrum. You don't necessarily need to have a holding company structure to compound over a prolonged period of time. So we've done different sort of drawdown fund structures. We've done C Corp, We've done a variety of different things. The way I think about it is regardless of the underlying structure, I think of our product as I'm trying to compound over at least a 10 year period.
[00:13:03] Speaker B: And compounding over 10 years. What you're saying by that is the hold period is at least 10 years from when you purchase the asset.
[00:13:11] Speaker C: That's how we underwrite. And if you look at our history, we've sold stuff. But I'm trying to think how do I put a dollar into a box and turn that into many, many more dollars? There's something goofy that happens if you're underwriting honestly to 15, 20, 25, 30 years. That's a wonderful whole period. The math of a model, it's so dependent on abstract things you can't control. One of the things with like so called holding companies or permanent equity structures is you don't know what is a true compounder that you want to hold on to. And what if the world decides one of your assets is the sexiest thing ever and they want to overpay you for it? You want the flexibility to monetize animal spirits if that's the case. So the way I think about our stuff is let's say we do five different sub hold codes, each one with $30 million of equity. The reality is three, maybe four out of those five we're going to scale it and then there's going to be a ocean of private equity money that will pay us a lot of money for it. And we may not really like the underlying business, but then there's like one or two that we have a runaway train or we have something that's going to 5x and then 5x and then 5x and all of a sudden we're looking at a multi hundred x in some like ideal way, sort of a power law distribution. So that's what I'm trying to isolate in what we do. I don't necessarily have a religion around permanent equity structures. I do think for some assets, hell yeah, I want to own the Seas Candy forever. But for honestly most of what we do, the traditional private equity structure is totally satisfactory. Honestly, we'll swell in four or five years.
[00:14:32] Speaker B: You're just holding on to the ability to isolate that quote unquote like portfolio company or set of assets that happens to just be in a league of its own. It's the Seas Candy, it's the Geico, it's the, the power law.
[00:14:45] Speaker C: Most track records are a power law thing. I give Buffett, he's got some quote, I'm gonna make it up, but it's like of my 400 investments, 12 have moved the needle and that's true for most track records. I feel like I'm just very aware of that. So everything we get involved with, yeah, I hope it's the thing that's the runaway train that's just going to compound forever. That b sort of naive of me. I'm trying to find that thing and then when I find that thing, own it. And you can do continuation vehicles and other structures, but they have their own issues.
[00:15:11] Speaker B: For us, it's often thought of that the power law dynamic is like the world of venture capital. Then private equity is the world of singles, doubles and triples.
I've heard that and been exposed to that sort of as the prevailing narrative in terms of how like private equity and control buyouts is different than did you happen to like be the series A investor in Uber or Open AI. But it sounds like the power law actually is more true across the asset classes than it is less true our.
[00:15:41] Speaker C: Specific product which is called roll ups or highly active M and A strategies. I do think there is a power law dynamic. Good counterpoint, Maybe a traditional buyout. Hard to say. Do you have like a real runaway? I don't know. Like it'd be a great result to get a 7x but it's really hard to get much more than that with aggregation strategies. If you look at the empirical history of these, man, there's just a graveyard of it. There's a ton of ones that just don't work, particularly in the 90s where they were primarily public equity funded. There's this one graph of all the PPM equity. So physicians and docs and whatever, it goes way up and then way down. That's why like roll ups is generally a dirty word. But then you have these really powerful counterexamples of these M and A stories. That was a thousand X constellations Standards aren't really roll up but an active M and A strategy transtac all kind of will thorndyke like companies.
So I do think of what we do as a power law product.
We're in this time in history where there's just so much goddamn private equity money sitting above us. If we're building an asset, it gets to scale and I don't know, we just don't feel that great about the business over the long term we can run a process and 60 private equity firm will show up and pay us 15 times for the business. Man, I want to hit that bid every day versus being like, oh this is my baby that I'M going to hold on for 50 years and that sort of thing.
[00:16:59] Speaker B: Could we maybe get into like some of the thesis development and the places where you've placed bets just to play it back, you're looking to be highly active in M and A categories that lend themselves to repeatable M and A efforts. And you're putting capital on a discrete basis behind these theses. It's not a pooled fund that's distributed across these. It's $2530 million against a thesis here, $2530 million against one here.
And those are discrete efforts against a given thesis. We talked briefly about Med Spa, which has become somewhat cliche as I mentioned prior to pushing Record.
That could be an interesting one to talk about or any of the others. But I'd love to just get into how you think about incubation, understanding that any single one of these incubation stories could become the see's candy for Tucker's Farm. But you also have this alternative exit button that you're very comfortable pushing.
[00:17:54] Speaker C: The C's thing is a good point because SEES is not an M and A story. That's a kind of a Genova or Greenfield. But that actually fits into what we do. We're looking for like high reinvestment opportunity. So on a multi site retailer, select categories, it's got to be the right concept can provide similar if not better compounding dynamics than M and A stories. That actually fits totally our thing, even though it's not like an M and A thing. So probably a lot of what we do is very much a derivative of decision architecture, underwriting frameworks, whatever. And on one end of the spectrum you have the avuncular buffets, Mungers, then you have the hard science behind great repeatable decision making that could be Paul Meal, Phil Tutlok, Conversky, etc. These are basic concepts. It's pattern recognition, base rates, checklist, things like that. And what's nice about a lot of those concepts is they map very nicely to rollups because rollups, you're effectively looking for a checklist and there's like to have or what are the 10, 15, 20 characteristics that we're looking for in a given industry? And then there's what do we really, really care about? Because if you care about everything, you kind of care about nothing. Probably in an aggregation strategy there's the quantitative stuff and the qualitative stuff. Quantitative stuff can be things that my research team can put a number on. So be industry growth rate, fragmentation, acquisition multiples, scale multiples, revenue quality, I. E. There some sort of like retention churn, recurring whatever metric recession vulnerability I. E. How to topline do in 080-9010 margin. There's a variety of these numerical things that we can assess and then there's a series of qualitative things that you need to make a judgment call on in a given industry that we will still put a number on but are squishier. So it could be key manners. If I'm rolling up dentists, if Peter's my dentist and wants to go have margaritas, I've lost all my revenue. Whereas if I'm rolling up McDonald's and Peter's serving burgers and wants to grab margaritas, whatever, I'm good. So operational complexity, acquiring H Vac companies, that's different than acquiring real estate technology risk. I always joke with my team, we don't want to be acquiring bunch of blockbusters before Netflix comes out. Industrial logic of scale. There's a reason we have like six airlines but we have 50,000 childcare facilities. And so these are all things that we try to make a judgment on. And ultimately you get some picture, oh, is this A A plus or is this a B minus or C plus or whatever. And I'd say like the punchline of when you do this across industries, it's very hard to find like an A.
Every HBS kid is looking for that A plus or that really compelling thing. There's no silver bullet.
[00:20:11] Speaker B: You just laid out a bunch of concepts, checklists, almost like stock screener type. You go through this process, you look at a bunch of different categories and then stuff gets spit out and it can be an A plus, an A minus, B. People, whether they know it or not, are in one way or another doing this. Pick one that you have already decided to put capital behind and overlay it against some of these concepts. If you take one of the areas where you're currently running a business or building a business, making repeatable acquisitions or multi site expansion, just lay one of those over some of these concepts and sort of how you got to a place where you were excited to spend the time and spend the capital to swing the bat.
[00:20:50] Speaker C: So Med Spa was probably the best example of this. It crossed across these metrics. It was such a compelling thing, super fragmented at that time. You could buy a billion dollars of EBITDA of true cash flow for maybe five, six times and there was one or two scaled marks that were awesome. The revenue quality, it was like, oh wow, it's this recurring Botox, at least this great Story. If nothing else, Key man is kind of less so than like a traditional physician practice management rollup. You're not dependent on the doc. You got you a few injectors, technology, risk, Botox, been around forever. It's probably going to be around for a while.
From all these different scorecard metrics, it did really well and boom, we went after it. What's funny is that I think we're the second or third platform that went into the space.
[00:21:30] Speaker B: What was the day one acquisition there? What was the size and scale of it? Did you buy a Metzar or did you incorporate and incubate one? And then what was the structure that you guys took on in this case.
[00:21:42] Speaker C: I put a C Corp Holdco together, put about $30 million of equity in it with no assets out there. Just like a strong thesis. I mean like a pipeline. But a pipeline as much as a pipeline can be a pipeline. You think you have a bunch of these assets, but it's a little bit different when you're actually in the industry and churning through stuff. Built the team out and then went after the industry.
That was one where like man, we put the thesis through the framework and it was like, wow, this came out on the other side really compelling.
[00:22:07] Speaker B: Was the first transaction a single box or was it a series of boxes?
[00:22:11] Speaker C: It was a terrible deal. It was one of these classic examples of really compelling math. At some point my partner was like, hey, Kyle, I don't think there's any way we can lose money on that. As soon as he said that, I should have known that this thing was doomed to fail. It had about $700,000 of cash flow. It was kind of across two units, but they had two more opening. It was like this goofily structured, crazy earn out and all this other stuff. I think we've shut it down. But that Med Spa brand today, before we shut it down, was burning like $400,000 a year. Last a quick few million dollars on that one. You get better at these things. In that moment we kind of knew it wasn't a great brand. Particularly in that thesis, injectors are generate your revenue and there was like a higher degree of turnover. And we just looked at historical cash flows and we're like, this thing would probably work, I mean, simplifying a more nuanced underwriting process. But it turns out a bad brand. Not only when you lose injectors, but it was hard to get more injectors. And so it was just a miss.
[00:23:04] Speaker B: You clearly pursued through this. Do you still own this platform? Is this platform at some level of scale or what level of scale did it get to? Because it sounds like you had a thesis, which thesis penciled out in a way that you got excited about. Then your first deal was maybe your worst deal, but then it sounds like you powered through. That's pretty interesting for sure.
[00:23:22] Speaker C: So I think we're pro forma for what we're about to close on. I want to say like 80 ish million of revenue, couple hundred million dollar valuation.
We're I think in the process of raising a growth equity round, but something like that. So totally like on paper, milish innings, but seem to work. I think it's a derivative of that underwriting process in particular because it checks so many boxes before consumer P really woke up to it and then consumer P woke up to it in a weird way that made that this is harder to execute because it's hey, I can't buy a million dollars of cash flow, particularly if it's well marketed for less than, let's say eight times.
So that's a negative. You know, it's harder to get to scale. Although like sourcing is our core thing. So we are still able to grow. On the flip side, the enterprise value of the business, the multiple of the business is very high. There's no inventory in this asset class for $20 million EBITDA businesses. So if you have one, particularly with the right systems, right team, and we've worked very hard to do all that sort of thing correctly, that's a very attractive thing to private equity. I think it's a result of that original underwrite. This does check a lot of boxes. Eventually a lot of smart folks in private equity woke up to that. And therefore there's like embedded equity value that is created from that underwriting process.
[00:24:29] Speaker B: When you shut down or were just struggling with the first acquisition, how much conviction did you have in the category and the thesis? To what extent did you go through like a period of real self doubt? How did you end up deciding to just power through and then get to a much stronger place? Despite having a really tough start in.
[00:24:48] Speaker C: This category, one of the beauties of rollups is it's a diversified portfolio of things. If you got the like category bet right, chose the right game to play, you're less dependent on the individual asset. I feel bad for search fund folks are so tied to like their individual street cleaning company in Topeka making sure that sucker works. Whereas if you're a street cleaning aggregator, you got 20 of those assets.
[00:25:10] Speaker B: But this was early. This was the first asset. It wasn't like you had built 10 or 15 of these and you had a lot of momentum and then you made a bad mistake and you were like, well that's a mistake, but I've already done this 10 times and I know that it works. This was harder than that. It was early on. It may have even been the first.
[00:25:27] Speaker C: There's definitely highs and lows. There's that Andreessen Horowitz quote. Entrepreneurship is oscillating between extreme terror and joy or something like that. That's very true, but yes and no. So we had committed equity capital on this deal. We deployed a couple million bucks. I felt good about like the underwrite of the category. This is going to work if we keep going and keep finding good assets. I always joke bad deals take years to season. So it's not like this was apparent day one. It was probably pain in the ass for the first six months, 12 months. It was only like a year and a half, two years into it, we're like, wow, we've thrown everything we have at this particular asset. We can't turn it around. It's not even like a math thing. It's more of a corporate team is spending a disproportionate amount of time on this lower tier brand. Their time is better spent elsewhere. That wasn't even totally apparent day one. Generally, if you have like a larger committed pool of capital, you can do more M and A if you believe in the thesis, which I don't think I ever wavered in conviction on the thesis, particularly because all while this was happening increasingly private equity was getting interested in that and I knew that. And by the way, we did a separate Med Spa investment that we ended up exiting and making a ton of money on. I knew the category bet was right. And even honestly if the category was poor, I knew that the animal spirits in private equity above the category was going to carry us home, so to speak.
[00:26:43] Speaker B: It's helpful just to get into some of those details. I agree with you. I think search funds are highly levered to a single bet. That's very different than building conviction and having then a repeatable path where if you don't nail it on the 1st, you don't nail it on every single one. The thesis is still intact and you're not upside down.
[00:27:01] Speaker C: I referenced Jake and Frank earlier did that's done various other things. They're fairly well known. They move with a high degree of velocity, almost like a Brad Jacobs velocity. And Frank's so far in many ways. And one of his takes is a lot of times velocity can take care of a lot of woes because you're not dependent particularly in like a key man risk business. Call it a med spar, physician practice management. Generally there is something to that. You're much less levered to one thing and you've all sudden got a portfolio of things. In those more individual dependent industries. You also see a greater small to big spread. So if you're going to roll up dentists or whatever it is you could acquire, I'm making this up so I don't know the latest, but you acquire for six times, you could sell for 14 times.
That spreads skinnies as you get into when the individual asset has more hair like more key man risk or more issues as a related concept. And a lot of times you get more paid for going after an industry where the individual assets less good because you get more of a scale benefit or a portfolio benefit than hey, I'm going to go roll up individual houses at a 6 cap. And when I put it together, all of a sudden my portfolio of houses is worth a five cap. Well, that means your multiple went from 17 to 20. You got three turns on a 17 base vers. I've acquired all these dentists for seven and I can sell for 14 or something. Where you get a true kind of 100% increase in your enterprise value.
[00:28:22] Speaker B: I don't want to force a connection where it doesn't exist. But I am curious now that you're multiple years into this work, how you look back on your time at Apollo and Viking and think about the way in which it informed you and shaped the way you're doing the work that you're doing today, how much of what you feel like you're doing today, what you're working at, where you're good, where you're trying to get better.
How much of that can you trace back to formative experiences either in investment banking or at Apollo or Viking? And how much do you feel what you deploy today in the way of skills and mentality and outlook and mindset are things that have more been part of your Tucker's Farm chapter? I'm just curious, what is the significance of the formation that you had in some of these kind of rarefied Wall street circles and how do you connect it to the work you're doing today and its value?
[00:29:09] Speaker C: I think that in scaling up my holding vehicle, taking on larger and larger limited partners and increasing the sort of institutional limited partner, the insurance companies, endowment managers, that sort of thing, I honestly think just in the Simplest way. In the simplest form, having that prestige on my resume early in my career has served benefits. It's opened doors. I was an outsider and I recognized certain names have real signals and so get on the inside. And then even a decade later, I think more doors open just frankly because of that experience. Even if there's very little direct benefit from Apollo, very much what we do is much more related to Apollo. We're value oriented, cash flow investors, private owned control, et cetera. Not buying a share in a company that's trading for whatever 20 times revenue and is 50 billion market cap. Every part of the job is much more related to Apollo. I will say that Viking really opened my eyes up not only to like business analysis, but honestly, creative research techniques. If you're one of these highly resourced hedge funds that's trying to figure out if the company's going to beat or miss on this KPI, you come up with like a lot of really creative ways to figure that stuff out. Even the simplest sense, surveys, expert networks, but to really proprietary data sources.
Viking was exceptional at this. I think getting exposed to a lot of that has informed how we do research. As you're going into a new industry, there's something about the friction in a given process.
But even the friction in thesis work, you want there to be friction. You don't want to be able to Google how many dentists are there and immediately 150,000 dentists comes up. You want there to be some sort of opacity to that sort of information because the more difficult it is, the more you get rewarded for being scrappy and creative and figuring that stuff out. And when I started this with Netspa, there was no information out there. And now there's 10 banker books that someone's forwarded me in the last 15 months where they kind of map out all these characteristics. But early on that was not clear. There's amp spawn but not much else. I got rewarded for like the legwork and doing a lot of various creative things to figure out. Honestly, just the checklist I was describing earlier, that's because of Viking. Apollo didn't do a lot of that stuff where Viking is heavily invested in that sort of thing. And obviously you get that right from glt, et cetera.
[00:31:28] Speaker B: I do. To what extent are you comfortable talking about some of the things that you are doing in that realm in terms of creative research? I think the point you're making about the friction being a good thing and not a bad thing if you're really pursuing outperformance. I Think it's an important point, almost a novel point because obviously everybody just wants to be able to Google things. And now there's ChatGPT and there's Grok and there's all these things. And so this idea of opacity being the basis for outperformance is I think maybe not appreciated enough by people that are in this market. How does the work take place for you, Kyle, and how does it take place for your research team?
[00:32:04] Speaker C: I think there's this evolution that I went through that a lot of folks go through where you're so obsessed with thesis. Let's start by saying the idea is 30% of the battle. Maybe actually in some abstract way. The only way you can compound to a hundred bag or a thousand bagger is really good game selection. But then a lot of just unknowable early on. Moving that aside, game selection, figuring out Thesis is something that I think people spend arguably too much time on. I have no data that supports this, but the like really smart folks that reach out to me, they're obsessed with have you thought of this really niche thing? And as someone who's done this for a while, I care a little bit less about that. But we do a variety of things to figure stuff out. But honestly the friction point is a good broader point. I'll have some Harvard Business School person say, hey, have you ever thought about rolling up, let's say, this franchisee system as an example? A wonderful thing about it is I can go into the fdd, this document that all franchise systems have to publish. There are whatever 50 pages of all the owners and their contact information that is the worst thing you want. And know this is counter to axial and your mission is awesome and it's serving a real purpose. But the more things are centralized and transparent makes our job of creating value more difficult. The market's huge, there's still plenty of opportunity. But if I'm going into an industry, it's like, oh wow, there's one industry association, it lists the 4,000 buyers. That's not a good thing. You want to get rewarded for basically the husk being scrappy, creative and tech forward and finding stuff out. And that's true not only from a research perspective, but also a sourcing perspective because our whole business is really much more sourcing oriented than thesis driven. We go after various themes and we will launch direct sourcing campaigns in a variety of industries. But we're trying to test the market to say, hey, is there what we call roll up market fit? Are there enough buyers and Sellers that we can basically build a $30 million cost EBITDA business over the course of a five year period. We do a variety of things, but the thesis is maybe less important than the actual generating deals apparatus and building that that's really where the value is created in this business.
[00:34:10] Speaker B: Can you talk a little bit more about the different areas where there's friction? You mentioned that there's pros and cons associated with a lack of friction or the presence of friction in terms of information and availability. If you can go to some trade association website and get the name and email address of all the key participants, if you can do that, then somebody else can do that too. If you can access the Axial platform and you have a credible profile on Axial as someone with real capital and real transaction expertise, then others can do that too. Clearly at the tippy top of the funnel, a reduction in friction. In some ways you like it because it allows you to get into these deals very quickly, but in other ways you don't like it. And I'm very familiar with that two minded, conflicted point of view that the buy side always has on information businesses. But could you talk a little bit about, like where else is there friction that you look for? You've talked about it at Discovery and top of the funnel. There's a lot of friction. The prevalence of NDA execution and the variability that a given broker has, or a business owner or an M and a lawyer who says we got to use this. There's friction all over the M and A process.
No matter how much standardization or aggregation of data that exists at the top of the funnel, there's this huge, huge cone of friction between the top of the funnel and closing a transaction. Where else do you see it? Where else do you look for it? Where else do you think about friction as something that you run towards as opposed to run away from?
[00:35:35] Speaker C: So it's gotta be friction around something that creates value. So to my earlier point thesis generation, it creates value. Ish. You don't want to spend too much time there. But in that subset of value creation, more friction is good, more opacity is good than less. But moving to stuff that like I actually spend most of my time on versus generating like a really shiny idea that looks good in a conference room is generating deals and not even closing deals. M and A is somewhat of a commoditized thing. Even the underwriting is somewhat commoditized. If you're Apollo or Viking or whatever, you might create value by having a different take or having some really Intelligent underwrite, but not really in this market. If you have some sort of value chain which can make it up and there's kind of thesis generation, you get the assets in the funnel and then you underwrite the assets and then you close the assets and then you operate that does create value. The headline there is operation is really like a talent question. A talent is downstream of sourcing as well. But of that what I just described pre operations pre close. I don't care as much about thesis generation. I mean we spend a lot of time on it, but at the end of the day I don't care as much about the execution piece of it. The underwrite is not the huge value creation lever. It's really how do you get the assets in the hopper. I want this to be like the great vampire squid of sourcing trillion plus eit up businesses. I say this to my team every day. I joke that on a spectrum of boiler room to bow post really thoughtful investment organization on one end and then hey, what are your numbers? Always be closing. We are squarely in the boiler room side because I believe that's what creates value in our business.
How do we find assets, get them into the business. That's a derivative of many things. It can be like a derivative of a process. How do I have like some standardized, call it NDA interaction. My team does that. They follow a cookbook, they follow our SOPs. They say there's a non compete that doesn't work for us or whatever. If it's this term. They're going through various if then statements to process NDAs. As an example of that, let's say pre that or post that we were interacting with a broker or seller. What do you say? What's the script? And their team is following various things on that. Then you get to an underwrite. We're pretty rigorous in how we analyze any given asset so that will go into its own process of a spread the financials model top line like this, fix variable costs like this. We're looking for this unlevered yield or whatever else that will go into our system as well. And then various judges on other things. Revenue quality, customer concentration, variety of other things. Everything is very process oriented. And what's so wonderful about this market is I don't know if I could swear in the podcast, but it's fucking horrible. It's not a problem that you could solve with AI. It's not a problem that you can solve with a bunch of people to do it really well. It's this wonderful mix of software Technology and humanity. If you're just AI, for example, some seller, I'm not going to sell their business to some, I don't know, chatbot. Whereas if you're just a bunch of people, maybe like a traditional lower middle market fund, you're definitely not using the latest technology for managing inboxes, managing sms, outreach, cleaning up lists or whatever. It's this really complicated optimization problem that I spend all of my time on, which is ironic because I was from this investment background, I think myself as this investor guy, but really my job has become how do I optimize this business? I'm very much like an operator in the sense that I've got team and I've got various bottlenecks, breakdown points. But every time we run into an issue, which is constantly, and we have some issue with our process or we realize we're AB testing and for this industry, X is not working and Y might work and my team's frustrated, I remind everybody this is a wonderful thing because once we solve this problem, we just lost four search funds, couldn't do this, and then this lower middle market private equity firm didn't do it, and now we've shed more competitors. I think there's a quote that's a successful business career is a series of problems well handled. I really think that that's the case, or at least certainly with our business. So we're constantly problem solving to try to like remove these friction points. But we want these friction points to exist because it's the whole reason that you can put $50 million into a box in this market and it turns into whatever, some multiple of that that's much higher than a traditional private equity product.
[00:39:34] Speaker B: What's your point of view on the durability of the friction? When you think about the next 10, 15 years in this market, you think about this combination of humanity, software, technology and just the imperfections of friction.
Do you have a point of view on what's going to become more important and what's going to become less important over the next five to 10 years?
[00:39:55] Speaker C: I think for sure the friction is going to be reduced. You look at financial markets generally people would just crush it in the 80s with these quasi hedge funds because they knew to go to the library to grab this filing that wasn't available here or whatever. So these things always go away in large part because of people like you. That's a totally wonderful part of life. And it gets back to my earlier point about like Buffett, you know, is an opportunist and we're Opportunists too. And I think, well, this is the hammer we're hitting right now. In 15 years we might look a little different because it's like, well, we thought the opportunity was there, but now we think the opportunity is here. But that's more long term. Abstract. Definitely there will be like a secular decline and friction over time. That being said, there is the small dollar issue. You have these people who do exceptionally well in the lower middle market and they grow and they grow out of it. Matt and Alex for Garnet Station is a wonderful example of this. They just kicked ass and now they have billions of a. And they're not my competitor.
[00:40:48] Speaker B: They've left the party.
[00:40:49] Speaker C: They've left the party. So there's a selection mechanism out of this market. There's like a little bit of that that will never go away. My whole thing is how do I figure out how to scale horizontally and still take advantage of this math and do it in a more scaled way, kind of like a shore alpine. These are successful examples of this. I don't want to build a fund structure where we're doing bigger and bigger funds and I'm more how do I build like a coke industry as a semi permanent structure where we can repeatedly take advantage of lower middle market mass.
[00:41:14] Speaker B: You want to try and find a way to stay in the lower middle market with greater and greater scale. I was going to ask you how you're spending your time. I think you sort of answered it and I wasn't sure. It sounds like you're spending a lot of time operationalizing around the friction points in the system. I do think it's ironic that someone who came from like this highly pedigreed, thoughtful buyout world that you would be spending your time operationalizing and scaling something like this.
How much time is spent on that? How much of your time is spent evaluating the intrinsic merit of transactions that are on your desk and that are at key points in time and how much time is spent by you with owners, founders, people who you're buying businesses from, where if you were to sort of say, I've got this operational scale thing that I really want to get excellent on behalf of Tucker's farm and my team. But I can't just abdicate my judgment over like the final call on buying businesses. And I also need to be somewhat instrumental in closing transactions with founders and sellers. What's the split of time between like the operational scaling up of Tucker's farm versus some of these more like bespoke, artisanal aspects of deal making?
[00:42:29] Speaker C: The reason I spend my majority of my time there is not because I grew up wanting to be Jack Welch, and I love operations. In fact, in a lot of ways, I'm an underwhelming operator. It's just. That's what creates value. If what created value was thinking big thoughts in industry stuff, which I've spent too much time doing as well, I would spend all my time there. As I've evolved in my understanding of this business and how to be the best of this business, it's changed. I do it because that's where I believe we can outperform. There's some things I'm really flawed at from an operational perspective. I'm really thoughtful about what partners I have to fill those blind spots, but I am pretty good at systems and optimizing a process now, repeatedly executing that process. That's something I struggle with. And that's why I have really strong and consistent team members. So I spend a lot of my time on that. Then moving down to, like, actually underwriting a deal, I'm a little cavalier earlier on and saying the underwriting doesn't create value. But the reality is, once it makes it through our basic underwriting process and all the filters and makes it to my weekly deal sheet, I will look at them. My team is pretty good at this point, so all the quantitative stuff is out there. And now it's more of judgment, discretion, along things that I can't systemize or implement this in a scaled way. I need to, like, use my body of experience and life and all this stuff to say, oh, I kind of like that. I kind of don't like that. Of the deals I'm working on in a given week, from an underwriting perspective, with my team, I'd like 50% of them. I'll immediately kill 50% of them because I'll say, oh, well, we missed this, or you guys missed this, or, we should add this part to our underwriting, because whatever. And then of the 50%, I'll look at that. But honestly, within an hour, if I have all the information, I'll go through the model, I'll know pretty much this is a winner. It's likely that I like it, but a lot of times, as I said, I don't like it, I'll go through it and realize, oh, what we have here is real. For example, at that point, if I really like something, and I actually, I know I really like. If I'm like, hey, include me immediately with the seller, the broker, the whatever, I'll get on a plane Tomorrow. Like, I know if I'm like saying those sorts of things, there's something that I really like about this. For instance, this week I was just with seller of an awesome business.
This is something that a few weeks ago made it to the tracker that I review with my deal team and started going over these individual deals specifically. Actually what you mentioned earlier, what mattered here was the ROI math of new builds and. And they had exceptional ROI method. We're very structured how we grade this stuff. And the grade was a plus. But you see a plus is a lot and you kind of dig in. You real. I realize, oh, no, there's all sorts of things that you can do to game that basic metric. And this was beautiful. Real Planet Fitness, Chipotle type roi, few builds, paybacks, whatever you want to call them and check the other boxes that we really care about. And I was just like, man, we have enough data points that this seems real. It's only got whatever, 10 units. But I think that we could dump things, 50 million bucks in here and turn that 50 million to something much, much, much bigger than that. I was like, I want to go meet with the selling family tomorrow. That happened. And it turns out they want some goofy price that we won't be able to pay for. But the plus sign is I got my ass on the plane and very much sold us as the best buyer for the business.
[00:45:21] Speaker B: You did right. That was key moment for you. There was nobody else you were going to put in at that point in the game?
[00:45:26] Speaker C: Yes and no. The partners in my firm very largely can do it without me, but I assist in them. One of my partners doesn't bring me into anything, and he does it and he's exceptional. My other partner is capable of doing it all by himself, but I'm like the color commentary guy while he's the real execution guy. And so we have a good dynamic. He loops me in and I'm eager to be looped in. And then my team beneath that, I do like being looped in just so I can like, all right, lead that call.
[00:45:50] Speaker B: That's what I'm curious about is in a world where maybe information gets more and more abundant and more and more plentiful, do you feel like that element of value with the seller is potentially one of the most durable areas to win for sure.
[00:46:04] Speaker C: So I think brand affirm and I think brand has done a fantastic job with permanent equity Being out there, you really want the people selling the business to know you as a great home with capital and yada yada yada. So I think brand is something that we are really focused on that is something that no matter how good AI gets at list building, we will be able to like persist and still outperform. And then there's a second piece of that humanity. I tell my guys, we get on the plane right away. As long as we have some indication of value that we're dancing on the same square and the dance floor or whatever a good analogy is, then we get on the plane. We were so excited about the asset that I just described. We shared our view of value and the response is like, I'm actually not going to share that with the team. And we went there and once the owner of the business, his family told us this wild price, I was like, I don't know if it was worth it anymore. I just went from like 60% chance we're going to get this to like 8% chance. Because there's just no way, even with a lot of structure are we going to be able to like sniff what they want. And I just wasted three days away from my family on endless planes.
[00:47:07] Speaker B: That's friction too. Who's willing to do that again and again and again and again?
[00:47:11] Speaker C: Totally. And the thing about travel often is if you try to quantify it in any way, it becomes really hard to justify. I got three planes and I got to do all this in bad hotel. And there's not like a really clear ROI in a lot of these things. But I tell my team, we all got to be traveling salesmen. It's, it's planes, trains and automobiles for all of us because that's how we're going to outperform.
[00:47:33] Speaker B: It's a great place to maybe leave it. This has been so good and really fun to just hear the whole story. I know a lot of people will be interested in it. I'm curious to those folks that are at Apollo right now that would be listeners to this. What is your advice for somebody who's in high finance and thinking about this increasingly well known off ramp into small business M and A? It's a unique combination of entrepreneurship, deal making, investing, operating. When you get phone calls from people like that, what do you talk about? What do you say to them? What kind of advice do you tend to give?
[00:48:09] Speaker C: Yeah, it's nuanced. So my original answer was, hell yes, go do it. You're going to make way more money, you're going to be more fulfilled, you're going to have more autonomy, you're going to be happier. It almost checks every box except prestige. So if you're willing to leave Blackstone or wherever it is, it'll be hard, but you will ultimately achieve all these things that are more elusive in that.
[00:48:30] Speaker B: Career with the benefit of all your experience. Now, what do you say?
[00:48:34] Speaker C: I've had one really bad experience where I gave guidance to do that and it didn't work.
I think the person incredibly smart and everything and from a really shiny background. And I think there's like a basic creativity, hustle, salesmanship, entrepreneurial energy that candidly I think I have that I thought that everybody kind of shared and this person didn't have that wasn't able to effectively kind of source deals and that sort of thing. My response is a little bit more nuanced. I do generally think it's the right path and I do encourage people because what happens is you end up in these large organizations and say like brainwashed, but you become goofily risk averse. You sort of like over quantify everything and you, you know, like the midwit meme where it's got the bell curve of intelligence and you've got the wizard on one end and the caveman on the other end and then you've got like the midwidth, the guy who's over complicating it. The wizard is saying, same thing as a caveman. I feel like a lot of these conversations, a lot of people end up being the midwit. Well, you use kind of fancy financy terms. Well, you just took advantage of this option and that's why it worked or whatever for you. And I think that's making it more complicated than it is. The reality is this journey, if you're dedicated to it, and honestly, most people in those sort of environments have the horsepower, I. E. The intelligence and work ethic and honestly, probably the likability. If you survive from banking and you went to kkr, you're probably socially intelligent as well. To be really successful in this environment and raise money and then turn that money into some multiple of that and take a hefty fee of that money and then be in a position where you're not only wealthy, but you have a degree of autonomy, which is what was really super important to me, and a degree of fulfillment that would be totally elusive in a traditional career where you have to exist forever. So my original answer was, hell yes, do it. Don't even think twice. This thing works. And my updated answer is, you gotta like think about who you are and more likely than not you should go do it and try it out and take a swim.
[00:50:30] Speaker B: This has been great. Kyle. Thank you so much.
Really, really fun to connect. Thanks for all the time this morning.
[00:50:36] Speaker C: Yeah, keep removing that friction, you know what I mean?
[00:50:39] Speaker B: For the record, you are one of the heaviest users of Axial. You've met over 1300 businesses from 560 brokers in the last 12 months. So kudos to your team for figuring out how to use the platform at a level of scale that few others have rivaled.
[00:50:55] Speaker C: No way. I didn't know that. I got to tell my sourcing ops guy. Good job.
[00:51:01] Speaker B: We can talk more about it offline. Good stuff. Thanks again for the time. It's been a great conversation.
[00:51:07] Speaker C: All right, see you Peter.
[00:51:08] Speaker A: 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 dealmakers, Axial's quarterly league table, rankings of top small business acquirers and investment banks, and lots of other useful content content that we've created over the course of time. If you're interested in joining Axial as either an acquirer, an owner considering an exit, or as a sell side M and a advisor, you can get started for
[email protected] as well. Lastly, if you have ideas for podcast show guests, feel free to reach out to me
[email protected] I promise I will respond. Thanks for listening.
[00:51:56] Speaker C: 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.
