[00:00:04] Speaker A: Hello and welcome, everyone. I'm Peter Lerman, and this is Masters in small Business M and A. This show is an ongoing exploration into the vast and undercover world of small business M and A, where we interview both the proven and the emerging owners, operators, investors, and advisors whose strategies and methods for transaction success have been put to the test. The show aims to surface the nuanced intricacies, the key ingredients, and the important factors that can improve your decision making in your own journey in the world of small business M and A. This podcast is produced by Axial, an online platform that makes it easier for business owners and their m and A advisors to find, research, and privately connect with a diverse mix of professional buyers of small businesses. In addition to learning more about Axial, you can find this podcast show notes, edited transcripts, and many other related resources, all for free at axial.
[00:01:06] Speaker B: Peter Lehrman is the CEO of axial. All opinions expressed by Peter and podcast guests do not reflect the views or opinions of axial. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Podcast guests may have ongoing client relationships with axial.
[00:01:24] Speaker C: Hey, everybody. Welcome back to masters in small business M and A. I am your host, Peter Lerman. Really excited for a great podcast. Today, we're going to dive really deeply into a career in manufacturing. A career both with an organic chapter and then an inorganic chapter with a lot of acquisition and then the creation of an acquisition vehicle to buy lots of businesses in the manufacturing category, so lots to cover with Ryan Sullivan, managing director and one of the founders of North Park Group. Ryan, thank you for giving us some time today.
[00:01:56] Speaker B: Thanks for having me, Peter.
[00:01:57] Speaker C: You got it. As we were talking about before, push and record, I want to just get right into this idea of manufacturing in America in the year 2040. It's 2024. It'll be 2025 in six months. It's a 15 year view. What do you believe in when you think about sort of manufacturing in America in 2040? What might it look like? How might it be the same? How might it be different? Think are, like, the key inputs to a strong manufacturing industry and economy? What are the inputs that make it viable and make it work, whether it's in America, whether it's elsewhere? What are the key inputs to a robust manufacturing capability in any given country?
[00:02:38] Speaker B: People make the world go around, and it's no different in manufacturing business than any other business. We focus, obviously, a lot on automation and a lot on efficiency and a lot of productivity gains in the manufacturing industry. But the core of that is always still people. And if you're going to have a growing business, you're going to have people in it. You're going to have the need for new people. I think the US and a lot of businesses has an aging workforce. And therefore just refreshing that workforce requires new labor inputs into the manufacturing segment.
[00:03:08] Speaker C: We're going to cover North Park Group, which is your investment firm and investment organization that youve built and are building to focus on american manufacturing acquisition and operation. Is there something specific about labor? Because obviously people make the world go round in every industry, right. And at axial, software engineering is absolutely fundamental to the business.
[00:03:30] Speaker B: Right.
[00:03:31] Speaker C: Great software engineers really matter to the success of our business and great salespeople and great marketers. So when you think about manufacturing, what is the kind of labor or the type of skills that are most important? And again, connect that a little bit to 2030-203-5204 when you look at that time horizon, what makes you confident that manufacturing businesses have access to these inputs over the time horizon that reflects your holding period, which is in some ways indefinite?
[00:04:05] Speaker B: Yeah, it is indefinite. Its interesting. We often acquire companies that have been around for plus or -100 years. And if you think about the last 100 years in the United States and you think about the changes that have taken place in the United States in the last hundred years, thered be lots of times where people would say, oh, geez, us based manufacturing, is it really going to survive? And are there going to be the labor inputs? They have survived for the last 100 years, and that obviously builds confidence that there's a way for them to continue to survive for the next 100 years. The type of labor that we need in manufacturing, part of what I love it is it goes across the board. You need everything from a computer science person and it people to people that can weld and bend metal and do manual labor. We need the full spectrum for us based manufacturing to be successful. Part of why I think we form North Park Group and we enjoy what we do inside of North park so much is because we're acquiring companies that have 30, 60, 90 people in them, and that business has put food on their table and provided for their families for 30 or 40 years. It's enabled them to buy homes, put their kids into college. And there's something wonderful about a business that enables that, especially for people that very often are first or second generation in the United States.
[00:05:26] Speaker C: There is a us manufacturing narrative out there. And if theres a bunch going on in that narrative, theres narratives around reshoring. Theres narratives around having lost a lot of our manufacturing base over the last, call it ten to 30 years, with the arrival of more free trade, the development of more partnerships and alliances through the World Trade Organization, theres a variety of factors. Can you talk a little bit about which manufacturing businesses and your experience have been able to withstand the change? You say there are these businesses that are 100 year old businesses, 80 year old, 60 year old businesses. What about those businesses has put them on the manageable and durable side of change? And what is different about the businesses that have not been able to succeed? They havent been able to survive? They were american manufacturing companies, and now theyre no longer what separates the winners and losers in american manufacturing over the last 30, 40 years. How similar is that to maybe the next ten to 20 years?
[00:06:23] Speaker B: Yeah, I mean, obviously, us based or manufacturing in general is just an absolutely huge segment. And there is manufacturing that is better placed other places than the United States and or can only be profitable or can only be delivered at a certain cost structure other places in the United States. And obviously, we stay, we steer away from those. When we're looking at buying businesses, we tend to buy us based companies that are already exporting ten to 20, 30% of their products. So I think a lot of people overlook the fact that there's a lot of us based manufacturing businesses that are exporting products to Mexico or to China or to Asia. Right. I mean, our Phoenix electric business ships about 10% of its product to Asia. And there's strategic reasons as to why they do that and why that actually supports their customer base, which often is actually back in the United States. We look for those businesses that have a strategic hook, that there is a reason why they need to continue to be us based. And a lot of times it comes down to either material sourcing or it comes down to quality, or it comes down to certifications or things that you can only get if you're in the United States. Some of that is based on legal or rules, and other of it is based on the DNA of the company.
[00:07:40] Speaker C: What do you mean by that? Can you say more on DNA?
[00:07:43] Speaker B: Yeah, there is obviously an awful lot of stuff that people want to have made in America. There's military products where obviously you do not want to do the manufacturing or the sourcing from overseas. Those industries often provide a very good hook for us based manufacturing to continue to be successful for the next 50 to 100 years.
[00:08:03] Speaker C: The military, obviously, is a clear end market. You mentioned one of the businesses that you guys own and operate now is shipping ten plus percent of its product offshore? Is that being shipped offshore and then being assembled into, like, a bigger component or some form of Oem? Should you just talk a little bit about what you're seeing there? Is that an indicator, when you dig in on a business, is that something that you're looking for is like 100% okay?
[00:08:29] Speaker B: Yeah. All the companies that we buy are shipping ten to 20% of their products outside the United States. We look at that as a key indicator of a chance of that business to be successful for the next 20 to 40 years.
[00:08:41] Speaker C: And what is that a sign of? Why is that an indicator of longevity?
[00:08:45] Speaker B: Yeah, I mean, obviously, I think if a us based manufacturing business can compete in Europe, if it can compete in Mexico, if it competes, shipping its products to Asia, there's clearly something about that business that enables it to be successful, not just, you know, near its customers in the United States. And that means that, I think, that business is much more likely to be successful against low cost imports. All of our businesses would either ship to end customers outside the United States or be shipping to an Oem that would be integrating our product into something else that theyre making outside the United States. And thats definitely something that we look for inside a North park group, because I think it supports the idea that theres something core to the business that were looking at acquiring thats going to make it a long standing business or keep it a long standing business in the United States.
[00:09:32] Speaker C: So in the case of that Phoenix business, those products are round tripping their way back to the United States by way of an Oem in Asia, is that right?
[00:09:40] Speaker B: Yeah, for a lot of them, you know, and some of it's because we have the capability to make things. Some of it's because, you know, we're the best supplier, we've got the best tooling. We tend to buy a lot of niche businesses, right. So they're not areas that a lot of other people would get into to manufacturing those products and those niche businesses tend to be both profitable but also long term surviving.
[00:10:02] Speaker C: To me, it sounds like theres two classes of protection around these businesses, and I want to see if you agree and think this is right or if this is oversimplified. It sounds like one form of protection for these businesses. And duration for the businesses has a lot to do with a limited amount of talent thats capable of actually making the product. Its a uniquely engineered set of products that call for either specific machines in partnership with specific talent, but it's fundamentally a sufficiently highly engineered product that it's complicated for others to build it and to build it at scale and compete on price. And then the other major advantage is some form of regulatory policy which protects the business from a regulatory perspective. Are those the two? Are there others or is that.
[00:10:57] Speaker B: Yeah, I think so. To the highly engineered, I would add customized. Right. So a lot of our products, we're making a specific part for a specific customer. We're not producing the same part for 1000 customers we've designed and engineered and we're making a very specific part for an end customer to fit their exact needs. You can say it's engineered or it's designed, but there's just a lot of customization. And that customization I think offers a level of protection, especially when that customization then needs to also be provided with quick turn lead times. And a lot of times we're talking relatively small quantities. We're not talking about making 2.5 million of something. We're talking about making 1500. We're talking about making batches of 3000 to a customer and provide that in an efficient supply chain customized to their application. Those products, there's a lot of reasons why they'll continue to be made in the US when they're going to obviously us based customers.
[00:12:00] Speaker C: Maybe before we get into some of the specifics of some of these companies and the North park way of raising capital and funding acquisitions, or some of the policy things that you just hope to see either change or stay the same in America that would be advantageous to, to manufacturing over the next ten to 30 years, what selfishly would you hope to see in terms of good policy that supports either the expansion or the maintenance of the manufacturing base in America as it exists today?
[00:12:28] Speaker B: Yeah, I mean, selfishly, I'd like to see immigration increase to the United States. I think it's the lifeblood of the United States and it's definitely the source of a lot of labor in the United States across all the businesses we buy. I'm always, I'm amazed. You know, our business president for Phoenix Electric, Alex Phoenix Electric was his first job when he came to United States or Mexico. Came at 18 years old, that was his first job. He started out cutting brass over time. He's run every job in that business. He's filled every role in that business and he's worked his way up because he's earned it up to being the business president and running that business. And he's now been there. I don't want to date Alex, but let's say more than 30 years and it's just a great success story and now he's on homes in the United States. He's put his kids through college. He's, you know, built a family and built a life. And that all started with him immigrating to the United States and bringing a skill set and, you know, his. His knowledge level, his technical capabilities. I think that is absolutely key to the United States and to us based manufacturing. And we have a story like that. I think, in every business that we own. I mean, it's just, we don't shy away from or underestimate the importance that these businesses hold to the people that work in them and the communities that they sit in. We just recently bought a building for Phoenix Electric and moved the business into a building that we own. And that's. We tend to buy the real estate because we long term holders of businesses, and we believe the business is going to be there for a long time. We bought that building. It's commercial on one side and residential on the other side of the street. We threw a party because we had a, you know, residences right across the street. At least four people from that street came and told us they used to work at that manufacturing business that went out of business, and they lived on that street. And they were so happy to see a manufacturing business come back into that building because it supports the entire community. It supports the entire neighborhood. And four out of, I don't know, 50 homes on a street were people that historically had worked in that company. And I think people underestimate how important that is in business and manufacturing, in companies and in communities thriving manufacturing community supports so many things in the United States, and we take a lot of pride in that, and it's part of why we love what we do.
[00:14:55] Speaker C: Anything specific from an immigration perspective? Do you have an orientation around different kinds of immigration with different levels of either technical education, or am I correct that Alex probably came to America relatively unskilled, right at 18?
[00:15:11] Speaker B: Yeah, he was actually looking at going to the mexican version of the Air Force Academy, and then he decided to immigrate to the United States. So specific to manufacturing means everything across the spectrum from a labor perspective. So people that were. That went to foreign universities as engineers or it people, I'm a big supporter of allowing them to immigrate to the United States. Skilled labor, 100%. You know, welders all the way down to manual labor. Like, the nice thing about manufacturing is, I think it requires that spectrum of people. And that's also why I like it. It's, you know, you can go from a to z in a manufacturing plant. With regards to backgrounds and skill sets and needs, and it turns out to be a very inclusive environment. You need all of it to be successful. And therefore, when you think about immigration or people coming to the United States, I support it across the board.
[00:16:02] Speaker C: What about trade school and trades and stuff like that? And, you know, are there things that could be better? There, are there better ways to, what would you do there if you were, again, if you were advising the next president on these issues? Like what would be your magic wand?
[00:16:16] Speaker B: I think people are starting to realize that you can have, you can have a great life and not have to go to college, and that often the economics, depending on what it is you love to do and what will get you out of bed in the morning, there's better economics and better options a lot of times than going to standard university. And, but I think we need to do more to support those alternative routes. Right. So skilled trades, trade schools, two year schools, I think they play a very important part in helping people be successful in the path that they choose to. I'm a big believer that there's not kind of one right path, and the people have to find the path that works best for them. But I think we've underinvested in a lot of those skilled trades or h vac, plumbing, welding, machining. We've underinvested in those because maybe they were less attractive in someone's eyes, but they're a resource and a skill set that's in huge demand inside the United States, which also means I, it's a great place to build a career, and it's a great way to provide for yourself and your family and build a future. All right.
[00:17:25] Speaker C: I'd love to switch gears and talk about some of these businesses. I think we'll sort of save the structure of North park maybe for last. Talk to me about, like, when you buy a business, right. You're looking for these businesses that tend to have, they operate in niches, they have customization capabilities, they have regulatory protection, you know, associated with either US Department of Defense or other sort of key protections. Maybe they have some advantage through highly skilled labor, and theyve proven themselves to be able to last the test of time. Theyve been around for typically 30, 40, 50, maybe even 100 years. So if thats what youre looking for and thats what youre buying day one, how ambitious are you in terms of changing these businesses? What do you want to change? What do you not want to change? What is your posture as you step in and start working with these businesses and take ownership of them.
[00:18:19] Speaker B: Yeah, we run an unusual model. Yeah, I think a lot of it is. It goes back to maybe me being risk averse. We focus on buying what has historically been a good business, meaning it's always made money. It's been around for 40 plus years. A lot of our businesses have been around for 100 years, and they've always made money, and they've survived all of the downturns. Right. So the businesses that we acquire made money during the housing market crash, made money after 911, made money during COVID made money through all the things that happen in business. And I always think its funny. Everyone says, oh, this is unprecedented. The housing market crash is unprecedented. Covid was unprecedented. And it just turns out in business, theres something unprecedented that happens every four to five years. The only thing thats unique about it is the name.
We look for businesses that have been tested and have been successful going through there. And so our strategy when we buy them is, well, we just bought a good company. And if we buy it right, then our strategy is basically, don't f it up. Right. Take the time to learn. Take the time to truly understand the business and learn the people and learn the customers and learn the industry. While we've been in manufacturing our whole careers, everyone inside of North Park Group is business operators. We're all people that have run businesses and manufacturing our whole career. But that doesn't mean that we know everything. That doesn't mean that we know every industry, doesn't mean we know every process, doesn't mean we know every customer, every segment. We're not the smartest people in the room. And so we try to be very patient. We try to acquire a company and just go in and actually learn it for the first year or two because we've bought a good company. Like, just don't mess it up. Right. Like, we don't have to go in and try to double our triple at the first year. We can go in and be patient. We're also buying companies that typically an owner has owned for 30 or 40 years. And we want to honor that. We want to try to learn from it. We want to try to be patient in that transition. I mean, it's scary if you've worked in a business for 30 years. I mean, yeah, the seller selling a business, they're going into retirement. I always joke that at this point, I think I've put 18 people into retirement and I'm still working. So clearly they did something right. Maybe I'm doing something wrong, but you're buying a business that's got 40 people in it. There's 40 people that need to show up to work the next day and they're all scared. They've worked for the same owner or for the same family for ten years, 20 years, 30 years. That is a very stressful emotional situation. And so we try to take care of that first. If you take care of that first and you take care of the people, you'll end up with a good business and we'll be patient. And yes, over time we start to make changes. When we start to improve the business, we start to reinvest in a business. We try to see what we can do to set it up to be successful for the next 50 years. But were very patient right after an acquisition because weve bought a business that survived the last three crises.
[00:21:11] Speaker C: Got a bunch of questions. Do you feel like you have, by the time youve diligenced a business and actually bought it, do you have a hypothesis for how you think you will, over the course of time, develop that business? Or do you not even push yourself to do that? You just assess the business, assess its quality, assess its durability, and just say, this is what were going to focus on once weve bought this business. Were going to take a totally blank slate mind and apply, you know, and sort of apply our creativity at that point. How much is pre transaction, how much is post?
[00:21:43] Speaker B: Yeah, we develop a thesis, obviously while were going through diligence and each ones a little different depending on the company. Im told to do anything new, I tell everybody. And so obviously by the time were buying a business, ive walked through the business. I understand the type of manufacturing. We very much stay in our lanes. We're not looking to buy high tech. We're not looking to do something that scares us or that we don't really feel like we intrinsically don't understand. So a lot of our businesses end up looking and feeling very similar when we acquire them. And we do have a thesis for all of them as to how we think we can apply our previous knowledge to improving the business. We're just patient and rolling that out. We have a few guideposts. We don't want to buy a business to shut it down and move it. We don't try to buy a book of business. We don't really do physical roll ups. We try to honor the legacy of the business that we're acquiring and keep it where it is. Which is why a lot of times we buy the real estate and a lot of the businesses that we're buying. Maybe haven't been reinvested in as much as they probably maybe could have in the last five to ten years. And so a lot of our thesis is about how to reenergize that company and how to bring in new equipment or to bring in a new product line for those businesses to help them be successful for the next 50 years. But we definitely develop a thesis that we build our models in a very conservative way, meaning we build our financial model, which our investors laugh at because we tend to model out our acquisitions at 3% revenue growth rate in relatively fixed financials. So we dont develop a thesis that then says, oh look, we can hockey stick the growth, or we can do this and we can double margins and blah, blah, blah, and therefore its a good investment. We basically look at the historical performance of the business and say, if were paying a fair price for it, and the business continues on historical trend lines, its a good investment for our investors, then we believe that obviously we can perform north of that. And so our investors often give me a bit of a hard time. They're like, 3% growth rate for five years, like, you gotta be able to do better than that. I'm like, yeah, and I'm just telling you, if it's a good buy at a 3% growth rate, you know, don't worry, we're obviously going to try to do better. And we have a thesis to do better. We don't build that into our financial models, because I think that's where you can create a lot of risk in an acquisition, is if you look at it and say, oh, geez, we can do this better, we can do that better, we can grow this. We, you know, it historically has grown at 3% a year, but we can grow it at 10% a year. And you build that stuff in, you're building in risk. That somewhere in all of those assumptions, you were wrong. And maybe then you overlevered a business or you overpaid for a business, it gets a little riskier. And so I'm very risk averse. There's a lot of my own capital, obviously, in all these businesses. And most importantly, we want to not put a business into a position where it's at risk. And so we really de risk our transactions as much as possible, knowing that eventually we get in, hopefully do some good work. We're going to do some stuff right. We're also going to do some stuff wrong. I think after most acquisitions, you get the j curve, and I think a lot of people don't build that into their models or think about that. When they're acquiring a company and so they buy and all of a sudden it goes backwards a little bit. Things change. They had to hire somebody. That person that they had to hire cost a little bit more than they thought. And you get this little dip in performance in the first year or two before it actually starts to normalize or climb back out. And we try to make sure that our businesses are 130% stable during that dip.
[00:25:16] Speaker C: What is the nature of that dip that you are okay with and what is the nature of a dip that is actually more concerning? Where, if you were to look at the p and L, where would you be like, if it dips here, I'm good. If it's dipping here, I'm not good.
[00:25:36] Speaker B: Nobody likes to dip really. I don't sleep at night when we dip. And I'm not necessarily the happiest person. When we diphdemdeze, we don't accept it at all. But we model, our businesses could typically go backwards 30% to 40% before we get into any trouble covering our debt service. Right.
[00:25:52] Speaker C: So we're very conservative at 30% to 40%. What metric, though? Are you talking about their, like, operating margin or are you talking about something else?
[00:26:01] Speaker B: Yeah, I mean, top line and bottom line. So call it 30% to 40% cash generation of a business, we can go backwards before we start to get nervous about our ability to service our debt. So we're very conservative with regards how much leverage we put on our businesses. We tend to put a lot of cash on the balance sheet. When we acquire businesses, we have access to a lot of credit that's not utilized when we buy our business. So it's, I wasn't building products during the housing market crash. Right. I was in telecoms during the telecom bust. If you go back through my career, I've been in the industry that like imploded like four times. And we want to acquire a company in a way where even if that was to happen again or when it happens again, we'll be fine. That business and that community well survive that well be able to come through the other side. So its a lot of people say, hey, you can make more money if you put more leverage on it. You can make more money if you do this. And Im like, yeah, theres lots of ways to make money in life.
Theres no right or wrong. This is just how we choose to do it. We choose to do it in a manner where we can sleep at night knowing that were going to be able to be good stewards of that business for the next 20 or 30 years.
[00:27:08] Speaker C: I guess what Im curious about is if you have an end market demand shock, thats adverse, obviously its not your fault, right? Its not something that happened inside the organization. Its an exogenous thing. And you have to be capitalized and levered and staffed to be able to withstand that. So lets all worry about a dip like that, because to your point, those happen. They happen every four years, as you mentioned, or something like that. What are the things that happen that make you much more focused on the specific just micro story at the business? When it's not an end market issue, it's not a market cycle issue.
[00:27:43] Speaker B: It's obviously lose it, losing a customer or a key customer.
I'm laughing because anyone that's worked with me right now is shaking their head when you say it's not our fault that the end market had a big shock. I tell people, we're business owners, we're business operators, it's our job to fix that stuff. It doesn't matter whether it's Covid or it's the housing market crash or, I mean, it's our job. We have people that work for us. We have people that depend on us to ensure the business is in a good position to put food on their table and enable them to have a job. And that is our responsibility. It does not matter what causes the situation. Our job is to help the business survive and ideally thrive through that. So we look at an external shock the same way we do an internal shock. Our goal is to maintain our revenues and maintain our cash generation so that we can provide not only for our investors, but also for all the people that work in our businesses. And, yeah, we've had to lay people off from time to time. And then we work as hard as we can to grow revenues back so we can rehire people. But obviously, we look at loss of capability inside of a business. So theres a lot in us based manufacturing thats aging out. If the owners of us based manufacturing businesses are aging out and all the boomers are retiring, well, theres a lot of people in the workforce in US based manufacturing that is the same. And those people have a tremendous amount of knowledge and skillset. And so when we buy businesses, we often see the seller retire. But usually theres some other people on the business that are very close to retirement as well. And so getting that knowledge transferred and surviving those shocks of a knowledge loss or a capability loss are things that we definitely focus on.
[00:29:29] Speaker C: Trey, I want to come back to something that you said in just terms of this vital moment when the business changes hands becomes owned by North Park Group. You typically have had an owner who's been with the business for 30 years. He or she has been the guy or the gal running the company. That's who the employees have come to know, to trust, to rely on. And given that these businesses have all been durable money making businesses, its reasonable to assume that theyve been relatively stable places to work over the last 2030 years. When you take control of the business and the news breaks to owners, can you just help me understand, how do you guys manage that period? What conversations do you have? What does it sound like to hear from Ryan Sullivan or another member that first day? What do you cover? How do you do it? Just what is that stabilization process that you pursue at that really key moment?
[00:30:29] Speaker B: Yeah, it is really scary for everybody. I think in 90% of our transactions were allowed to talk and announce to the employees before we close the transaction. That reduces a lot of risk on our side. Also tends to make the owners feel better, makes the employees feel better. But that first meeting, I mean, there's. I don't think I've done one yet where there's not tears involved. Right. Someone's crying, the employees are crying, or the seller is crying. It's a very emotional meeting or announcement that they've decided to transition a business to outside the family, you know, and so we prep for it. We print frequently asked questions that we can give to all the employees. We printed in multiple languages because in us based manufacturing, you know, chances are we bought our Wichita business. I think we had seven different languages that we had to translate the frequently asked questions into. Because. Because it's like hearing any shocking news, the employees hear it. And then if you stand up and tell them ten things, they didn't hear anything past number one, because they're just shocked. Right? So we write it all down that way, when they get home and they're talking to their significant other, their family, or their neighbor, and they tell their neighbor, oh, my goodness, the business I worked for 30 years is being sold. And then that person starts asking them questions. It's another shock to them, because now if they can't answer those questions, they feel even more stressed. And so we give them paper to take home so they can read it, they can reference it when they're at home talking. We give everyone, offer letters to give them the confidence they've got a piece of paper that we're going to rehire them and that they're still going to have a job. It also enables us just to make sure we've got the right person at the right wage, at the right job. You know, there's nothing worse than someone's first paycheck being wrong with the new company, right. That causes a lot of stress and emotion, and it's just a lot of conversations we stress with people. Our whole strategy, and I think that's why we're a good buyer for a lot of sellers, is that our strategy is to listen and learn. We're not rolling in day one looking to make a lot of changes. We're rolling in day one to try to learn. And the sellers are going to be there for six months, twelve months to help us transition. So, and I tell everyone, like, hopefully day one when we actually close the acquisition, is very anticlimactic. Hopefully everyone's looking around going, well, nothing changed. And that, to me, is a great acquisition, right? We bought the business, everyone showed up, everyone did their same job, everyone got their same pay, you know, customers got service, the phone got answered, and everyone went home. And someone says, ooh, today was the first day under new ownership. What happened? And if they say just every day of the last 20 years, I'm like, that's a great acquisition. And we try to reduce the drama as much as we can. And it's hard. I mean, somehow, like, I didn't plan to get good at this. I mean, I've done it like 20 times now. Like, I'm half therapist, you know, half engineer business owner. I mean, we've just gotten good at helping people through it. It is a very scary thing. And I think thats why weve been successful buying companies is this idea that people believe were going to be good owners for the next 30 years. And that is both through the acquisition and on, weve never retreated an Loi. We tend to view buying a business as a partnership. From the time you meet a seller, negotiate an Loi, do your diligence, close the acquisition, and then transition them out of the business over six to twelve months. You're with these people for two years. If you don't view that as a partnership, you probably shouldn't be doing the deal.
Three years later. We still have sellers that come back to the Christmas party and walk into the business and say hello. And we want that kind of relationship long term with as many sellers as we can. I mean, it's important. You're spending a lot of time going through a very stressful situation. And it's stressful for us, too. We're putting out a lot of money. And if an acquisition doesn't close, I wear that. The investors don't wear it until everyone signs on the dotted line. Its a stressful situation for everybody.
[00:34:11] Speaker C: As I was just listening to you talk about how you model things and assumptions that you make and managing risk, being able to handle 30 40% downdrafts. From a leverage perspective, it would be interesting to hear how you think about becoming the winning acquirer for a business. Obviously one of the things that matters a lot to an owner is the value of the business, right? What is the value of this business? Can I get a fair value for this business? The terms matter a ton as well. If youre modeling things with 3% growth, if youre modeling leverage in a way that can withstand 30% to 40% downdrafts and other buyers are not and are therefore capable of taking on more risk and having that expressed in their lois, how do you think about how do you win with the level of conservatism that you do? And Im interested. I mean obviously you have this great background as an operator and that obviously is very helpful, Im sure. But could you talk a little bit about how you do all of this conservative thinking and conservative valuation and nonetheless find yourself as the winning buyer of a business thats been printing cash for 30, 40, 5100 years? It seems like somebody else would beat you maybe more often than not. So I'm curious to hear how you think about that.
[00:35:35] Speaker B: Yeah, we lose a lot.
We're definitely not buying every business we find and we look at we're trying to buy the right business for us and the right business for us is that partnership. It's the right seller. It's the right type of manufacturing. There's a lot of gates an acquisition has to go through to be the right fit for us and to make us the right buyer for a seller. We look at a lot of companies and we spend a lot of time kissing frogs hoping that they'll turn into something else. And yes, we could be more successful if we took more risk in buying. I don't know if that means that our returns would be more successful, but we could buy more companies. But we're doing this.
It all comes from the origin. Everyone has an origin story. We're doing this because we enjoy doing it. We're doing it because we like us based manufacturing. We're doing it because this is how we want to spend our days. We're not doing it because we're looking to make the most money we can possibly make. We're not doing it because we're trying to become a gigantic firm of 1500 companies and compete with ITW. We're doing it because we love it. We don't want to sit on a beach and retire. We want to go to work every day. We want to work hard. We get to choose the way that we do it. And a lot of the times we win were not the highest bid. So clearly we found a seller who values things other than just the sale price of their business. And also, I think the segment were playing in. We tend to go 500,000 to 3 million of EbItda. A lot of private equity doesnt go below three or 2 million unless theyre looking at bolt ons. And if its a bolt on, a lot of times they might be shutting the facility down, rolling up the business, which a lot of sellers don't like. And the purchase price of a business that's a million and a half, $2 million. And EBITdA is north of where a lot of solo business buyers. So a true I'm trying to buy a business for myself. A lot of people can't afford to do that transaction. So also the sellers are stuck in this kind of odd place where there's not necessarily a ton of buyers or a ton of ideal buyers for that business. When you get down below 500,000, you have a lot of one off buyers looking to buy a business that theyre going to own and operate and run were in this space that I think we find our win rate is pretty good in that space. Our win rate wouldnt be nearly as good if we went after a $5 million EBITDA business because theres going to be a lot of people who pay a higher multiple or a lot more money or take a lot more risk on it. But maybe we just got lucky. Theres a lot in life that just happens because youre lucky. But we like the types of businesses that we buy. We tend not to 1000 person businesses. We like 60 person businesses and 100 person businesses. I like walking into it and recognizing every face in the business and everyone in the business, you know, knowing each other's names. Right. Like, we like that atmosphere of that type of manufacturing business as well. And we like the accountability where you're in a small business, you can't just not show up one day, right? I mean, everybody wears a lot of hats, everyone's doing a lot of stuff. It's a dynamic environment, but its an environment where you truly learn a lot about business. You dont just sit in your little function in a small business. You do everything in a small business. And so you learn a lot more about business operations and the way businesses work and function. And we enjoy that. Thats what wed like to do. So our strategies come from kind of who we are and what we like to do. And it works for us, it works for our operators that are running businesses a lot of times would be your equivalent of an independent sponsor. It works for our investors and it works for employees. So its just a model that weve carved out thats a little different than what other people are doing from what im told. But we enjoy it. Thats the guiding principle. I think we like what were doing.
[00:39:19] Speaker C: Most investment firms, the dominant DNA in the investment firm is investment banking background, private equity background, corporate finance background. And over the last couple of years or decades, depending on how much of a student of history you are on the evolution of private equity investing, that dominance of the corporate financial type has winnowed down and there's more and more operators that are part of these organizations as operating partners or as operating advisors. North park group starts at the completely opposite end of the spectrum. The whole team is operators or at least day one. It was like that. There wasnt a single ex investment banker in sight. Can you talk about how you think about evolving the North park group talent mix? Do you anticipate bringing, do you want to bring some amount of financial expertise and acumen that comes from a more traditional background into the organization? Is that anathema to you? Like, how are you thinking about the way that North park group evolves given that it was 100% operator, 0% finance day, one night? And, you know, and which is not to say, I mean, you were a chief executive. You have other people who I'm sure have had like lots of. So I don't want, I don't want to like misrepresent that you guys, you know, don't know how to look at financial statements? That's clearly not the case. But I'm just curious how you think about the evolution and the design of the organization and how you think about recruiting financial acumen into the organization separate from the operators.
[00:40:56] Speaker B: We have a lot of finance people now. Theyre not investment banker people, finance people. Theyre manufacturing finance people. Right. So theyre people who came up as a cost accountant controller through CFO of a manufacturing business. Caleb, who runs our electron business. We hired him to be controller CFO of Electron and now hes business president of electronization. So we do have a lot of, I guess, corporate finance capability inside of our organizations. And we have Robert Gore now who does finance across multiple companies for us? But again, his background is not investment banking, private equity, it's corporate finance. I don't know. I think it'd be fun to see how long we can go without having to have an investment banker on the team. I think that as a challenge maybe we can get to twelve companies before we and were never planned on selling.
I jokingly say that people can figure out what to do with all the companies. When Im dead, were buyers, not sellers, were going to be long term holders. So were really only doing one side of the investment banking. Were just on the getting in part. And then after that its all operating. So when you think about our lifetime inside of North Park Group, yeah, we have a bunch of work for 612 months to buy a company, but then we've got 20 years of running a company that where the real work gets done. And so the majority of our staff or our team should be focused on those 20 years, not on the buying side. We like running companies. Buying them is stressful. Selling them is really stressful. We want to spend more time doing the thing that we love, which is running and operating in manufacturing businesses.
Usually at this point everyone asks me, he says, okay, very conservative model. You're under leveraging them, you're buying these companies like what kind of were running a 20% annualized return across our portfolio and over two and a half years. Its a pretty good track record so far. And we model our returns again in a very conservative way. Id basically say if we bought a business for X and we sell the business for X and the amount of money we made was the debt reduction and the cash generation during that time period. So thats how we calculate our 20% annualized return. We dont do mark to market. Even if we doubled EBITDA, we dont count that as a return because its not a return to our investors. The only return to our investors is the cash that they have and the idea that ideally everyone could agree, we could probably be able to sell our businesses for what we bought them for and if not more. Thats a conservative way of looking at our returns and were generating, like I said, plus 20% annualized returns across all of our portfolio companies.
[00:43:32] Speaker C: So this is a perfect time to switch gears and talk a little bit about this through the lens of an investor, an allocator of capital to North park. Right. So the returns profile, its early in that its a few years in. Right. But the returns profile that youre talking about is its very competitive and its very conservative in terms of how youre actually achieving that. Its not a function of multiple expansion or other things. So those are compelling sale points to an allocator of capital. But youre also on the record saying that you guys will figure out how to deal with these businesses once im dead, because were not selling them until then. So what is the liquidity conversation that you have with investors? What do you talk to them about? How do they get comfortable with that? What have you done in the way of liquidity in this first two to three years? What are you thinking about doing over the next few years? Lets just talk about this whole topic.
[00:44:26] Speaker B: It goes back to our origin again. When I spun out of my last role, Greg Tolpo, a partner, said, hey, this is a great strategy. We should do it for ourselves. I said, okay, I got some money. I could probably buy one to two companies. Id rather buy six to eight, but whos going to give me money? And Greg said, oh, we can definitely fundraise. We can definitely find investors. And that was completely foreign to me. And id never even thought about the idea of investors. Lo and behold, we could find investors. And I was putting in, obviously, a lot of my own capital, and that was great. But I also didnt want to wait five years, seven years, eight years to start getting money back. I needed cash flow back from my investment to live and to fund and all that kind of good stuff. So we structured it through SBA loans. The reason we ended up with SBA loans is a few things. One is its a good debt structure for businesses of this size. You typically cant get commercial debt. Theres not enough assets in the business to, a lot of times to back up commercial debt. The interest rates are better. But the one thing that the SBA allows you to do is to pay distributions and where most commercial debt doesnt allow you to pay distributions until the debt is resolved. So we can have a ten year debt structure against the business, and we can pay cash distributions in excess of tax to our investors. And so weve paid, I think, now three quarters in a row, a distribution from one of our portfolio companies back to investors. So weve done lots returning of a preferred return or equity even to our investors in the first two and a half years. And that was important to me because North Park Group kind of started as Greg and I are going to go buy some businesses. And then we started to get some investors. But I was like, well, for me to put this money to work, this is what I need in return. And so North Park Group ends up almost like a hybrid real estate investment, private company investment, because, but were buying well, but were returning cash during the hold period. To investors, thats a good cash return relative to the equity in our deals, while at the same time paying down the debt on the business. Thats how our investors get liquidity, and thats why theyre okay with the way we model the returns is because theyre getting checks. And we view the checks that investors get is really the only thing that matters. Everything else is on paper until its in your bank account. Its not real money type of thing. And we needed that as operators for our personal situation. And that's where our investor model and structure came from. Right. We wanted to limit how much risk we were taking, personal guarantees and buying businesses, and that drove our leverage ratio. We were willing to trade off a few percentage points on annualized return to less risk and more stability of the company. And then, and honestly, a lot of sellers like that seller doesn't want to hear that you're putting 90% debt against a business, because most people who have owned a business for 20 or 30 years understand how scary and risky that is for the business. So our investors get lots of liquidity. That's why all of our investors kind of follow us from deal to deal. We want them to be diversified the same way that we are. You know, we didn't go by one big company. We wanted to buy 6810, twelve, you know, 14 companies. And that's part of why I want to bring partners into North Park Group. So, you know, Scott, who's running our never league business, spun out of his last role, wanted to buy a business, partnered with us, because we then wrote him in to all of our other companies. So as an independent operator, we didnt just help him buy a business. We helped him buy a business, but also then instantly gave him diversification, because now hes participating in every other company inside of North Park Group. And thats, I think something else is very different about our model. I mean, im a big believer in diversification. Im a big believer in us based manufacturing, a big believer in risk reduction. And that crafts a lot of our strategies.
[00:48:07] Speaker C: How are you bringing him in? All of those businesses have been acquired. Youre giving him exposure to those. Can you just talk a little bit mechanically about how youre doing that?
[00:48:16] Speaker B: Steven we structure our deals like a typical private equity deal, and we did that also because thats the verbiage and the structure that our investors understand and know, because most of our investors are all certain private equity deals. So we take a management fee from the business we have a carry percentage that well get once investors get their equity back. And so im able to write an operator like Scott into the management fee for the whole portfolio instead of just the management fee for his business. I can write him into the carry across the whole portfolio instead of just the carry for his business. And even though theyre all separate legal entities, we can do that. And it doesnt change the equity position or anyone. It doesnt dilute our investors. And then, Scott, instantly, if weve got four businesses now, we should have five here in August. If another business grows, Scott benefits. Even if Scott businesses is stable, another business grows. And that means our management fee goes up or we get into the carry. Thats good for Scott. So that also means that now this portfolio of independent companies operate as a family. We're all incentivized to help each other. We're not an operator running a business on an island. I mean, the scariest place in the world is CEO lots of times. And definitely the scariest place is CEO of a very small business like you are a person on an island.
When we put all these companies together, it does give us some synergies. It gives us some places that we can leverage that. But most importantly, it gives, gives all of our operators and our businesses somewhere to call when they need help. Theres always somebody in the portfolio that has dealt with that challenge. And so we have companies on the portfolio that make parts for other companies. They werent doing that when we bought them. We did that afterwards because that was a good, better supply source than buying externally. So anything we can keep in the family, we try to keep in the family.
[00:50:03] Speaker C: Trey, its really cool to just hear some of the specifics there. I remember when we talked a few weeks ago, we talked briefly about this occasional ability for you to actually be transporting some skills back and forth across some of your companies. It reminded me of when Elon Musk was taking some of his top Tesla engineers and sending them over to Twitter right after he bought the company to really go see if he could understand the Twitter code base. And he had his top guys at Tesla Wander down to the Twitter headquarters and spent some time trying to really understand that code base. You've been doing things somewhat like that, where you've got some specific skills inside of one business and you're moving it to another business on some interim basis. Could you just talk a little bit about that? Seems like a really cool capability.
[00:50:47] Speaker B: It's great. I mean, a lot of people that are operating in small businesses, the only thing they get is ThEy get a little myopic, right. They understand their business and their customers and their segment. They don't get the chance to experience other business models and other types of manufacturing. And so we love moving people across the businesses, even if it's just for a visit, because they get to see and experience some stuff and know some people. And then we do a lot of plastic work now. And, you know, Alex is great at mold making and we share sources and Alex helps our electron business with molds. Different machines have different capabilities. So maybe we have a machine in one business that can make a part cheaper and faster and better than another business. So we're able to move things around the portfolio. And then most recently, right now, actually, we have, I think, six people from our Dickey manufacturing business in St. Charles, Illinois. Down in our Mississippi business, never leak running a night shift. And that's because the neverlake business, we just recently bought it in April of this year. Demand has been very strong. They were only running a day shift. We started running overtime. We're trying to keep up with the demand growth of the business. And so we were able to take our entire second shift from Dickey manufacturing, which right now is a little slow from a demand perspective. And that whole shift is spending two weeks down outside of Mississippi running our machines at Neverleague. And we asked, right? We didn't tell them they had to go. Was like, hey, here's an opportunity. Would you like to do this? And the entire night shift raised their hand and said, that'd be really cool, right? Like we get a chance to go to another business, learn new machines, they're going to make more money, right? It's good for them, it's good for us, and it's great to see that kind of interaction across a portfolio of companies. And if Scott had bought an everlake on his own or was a man on an island, he wouldn't have had that ability to just get a night shift. He'd be trying to get temps or trying to staff it up. And instead, inside of two weeks of us having the idea, he's got six people there running a ten hour shift for four days in a row. It's great, it's great for customers because what customers wanted was, hey, let's get the products out. And we're actually switching people away from our competitors because that whole industry now seems to be a bit tight on supply. And so our ability to ramp up like that is actually capturing market share for this business. Now that we've owned for in four months, its fantastic, its really cool.
[00:53:05] Speaker C: Its been really fun to get into some of these details. I dont have any lightning round or typical closing questions that I ask, although I know theyre maybe a good best practice for a podcast host. Im really curious though, Ryan, as you look back on your career, its very clear that you have a couple very important, carefully held beliefs in terms of how you want to do business, where you want to do business, the way you think about buying and what you think about underwriting, the way you think about treating teams. Could you share just who you think is maybe the biggest influence on you as a business professional? When you think about your career, what has molded you the most into the investor and operator that you are today? When you think back on the people you've worked with or the managers that you've had or any heroes in your past that have been a big impact on you, it'd be really interesting to hear what shaped you.
[00:53:57] Speaker B: Well, you should, you should have prepped me on that one. But before the call, I mean, I hate to throw a name out without checking with the people. I mean, obviously I spent twelve years, I think, at James Hardy Building products. That shaped a lot of my belief in manufacturing, a lot of my belief in us based manufacturing, a lot of my belief in company culture. There's a lot of good and a lot of bad at that company, you know, but the idea that everybody in the company, from the CEO down lots of times had jeans and a t shirt on because we were getting dirty, we were doing real work in a billion dollar company was something that I really enjoyed. The idea that us based manufacturing can thrive and be really successful if you find the right niches, I definitely learned from there. And this idea that one of the coolest things about us based manufacturing is that for it to be successful, you need everything from the forklift driver to the CEO to be really good at their job and to really like their job. And that even a billion dollar company breaks down if you don't have good forklift drivers. Right. This idea that I always say I have kids. So, you know, we used to read doctor Seuss all the time. And there's a doctor Seuss line of person's a person, no matter how small is, I just think a great quote. And that's why, and that's formed a lot of what we do. I mean, we buy companies. We put a retention bonus in place for all of the employees. Hey, if you fight through the next two years with us, we're going to give you a bonus. We want the fact that sellers sold their business to be good for employees, not just good for the seller. We only have one class of investors. We don't have any special investors. No one has different terms. No one has different percentages. My money is in at the exact same way our investor money is in. There's everyone's in the same boat. And when everyone's in the same boat, row in the same direction, I think you get a better result with a lot less conflict. So Hardy definitely formed up a lot. The fact that I was in telecoms during the telecom bust and Hardy during the housing market crashed, you got to see how, when businesses went backwards, how rough that was for people and for communities. I mean, we mothballed entire plants when I was at Hardy, and you're talking about 200 people losing their job, and 200 people in a community losing their job is really impactful on the entire community. And so that's definitely shaped a lot of our strategy or my core beliefs, as I counted on some material. And I got to really understand the application of capital, and thats where I really started buying companies, and they were very supportive of that growth initiative, and it was very successful, both for the firm and then formed up a lot of this strategy. How do you buy a good, small, us based manufacturing business and de risk it?
Theres a lot of reasons why people dont want to go below two to $3 million of EBITDA. They view them as more risk and a lot more work. And I get that. Its a lot of work, maybe for less dollars. I understand that. But I think we found a way to target and pick the right companies where weve taken the risk thing off the table, and that makes it much more attractive for us as operators who are living in these businesses, as well as for our investors.
[00:56:58] Speaker C: This has been a ton of fun. Ive learned a lot just in the last 60 or so minutes. Its really inspiring to see somebody doing this kind of work in the way that you guys are trying to do it and the way that you guys are doing it do it in the right way. Thinking a lot about the people, thinking a lot about community. Its a huge breath of fresh air. I think if more and more people are aware of these kinds of private equity stories, they will develop a much better, more balanced understanding of what can be done with private equity capital, as opposed to just think that its all a bunch of bad people abusing family owned businesses to enrich themselves. So its a really inspiring story. It seems like you guys are off to an incredible start. Ize can't thank you enough for a great episode. It's really been fun. Thanks Ryan.
[00:57:44] Speaker B: Thanks for having me Peter. I appreciate it.
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