[00:00:04] Speaker A: Hello and welcome, everyone. I'm Peter Lehrman, and this is Masters in Small Business M A. This show is an ongoing exploration into the vast and undercovered world of small business M 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 decision making in your own journey in the world of small business M A. This podcast is produced by Axial, an online platform that makes it easier for business owners and their M A advisors to find, research, and privately connect with a diverse mix of professional buyers of small businesses. In addition to learning more about Axial, you can find this podcast show notes, edited transcripts, and many other related resources, all for
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Peter Laraman 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.
[00:01:21] Speaker B: Steve, thank you so much for coming on the podcast. Masters in Small Business M A. It's great to have you with us.
[00:01:27] Speaker C: Yeah, I'm thrilled to be here. Thanks for inviting me.
[00:01:29] Speaker B: So, Steve, you've got an incredible biography. I'm going to cover that in the intro to the podcast. I want to just dive right into what I think might have been one of the most substantive chapters for you personally, and certainly one of the big precursors to the formation of LFM Capital, which was a decade plus at Dell Computer Corporation. And there, during just the go go days, I think it was somewhere in the neighborhood of 18 to 80,000 in employee growth over your period there. So an incredible chapter for you at a company that pioneered so much in manufacturing. Let's spend some time on that opportunity. First, why don't you just tell me how you earned that opportunity just to kick things off and how it got started?
[00:02:12] Speaker C: Sure. Well, I was graduating from a program at MIT that at the time was called leaders for manufacturing. That's a dual degree program. And I ended up just through the recruiting process, connecting with Dell. They actually weren't interviewing through the program. They were interviewing through the Sloan school, but connected with Dell and the program that I attended really made me passionate about U. S. Manufacturing and about building a career that's kind of anchored in us manufacturing. And Dell at the know was really well known for its build to order model for computers, which just gave it a massive cost advantage over the competition. And so I wanted to go someplace that really was going to value what I was passionate about and that where operations and supply chain were kind of part of the secret sauce. And Dell was definitely one of the few companies where that really fit the bill at the time.
[00:03:11] Speaker B: So let's dive into the job chapter that you had there. I know you had a number of different positions when you joined, and you joined, I guess, right out of graduate school from MIT, is that right?
[00:03:21] Speaker C: Yes, I did.
[00:03:22] Speaker B: So, yeah, I'd love to. Maybe what we could do is just tease apart the sort of major chapters of your time at Dell into. And if you could just go through sort of what you were doing and some of the major lessons and takeaways that you took with you when you left, I'd love to hear about those, just because they're such a great opportunity to dive into manufacturing. Obviously, you're running a manufacturing private equity investment firm now, so I'm sure it's just a really interesting place to spend some time. So, yeah, I'd love to just hear about, I guess, the different jobs you had there and the major takeaways from the different moments working for the company.
[00:03:59] Speaker C: Well, first of all, I'd say joining Dell was growing very rapidly at the time. It was the fastest growing stock of the. So I was very fortunate. The job I was offered when I was recruiting was like manager of strategy for the workstation line of business, which I learned after the fact was almost a made up job to get me in the door. And what happened was they had talked about, after I'd been there a year or two, being able to take on a large leadership role in a manufacturing environment. And the gentleman that was leading manufacturing for the workstation line of business ended up getting moved to Mexico because we were growing rapidly there as well. And so literally I got promoted my first day at Dell.
They said, hey, you thought you were coming into this strategy role that was going to be an individual contributor job. And, oh, by the way, we want you to help start up a new factory that we've already poured the concrete for. But you're going to hire the entire manufacturing team in about a four month period, and it's going to be about 320 people when you're done. And so right out of business school, I was hiring second level managers, first level managers team of 300. And within six months of starting at Dell, was managing a team of over 300 people, which is definitely pretty rare for somebody coming right out of business school.
[00:05:21] Speaker B: And that factory was the one that was getting built in Mexico or this was a different effort.
[00:05:25] Speaker C: No, this was being built in Austin, Texas. It was called the Parmer factory. Half of the factory built servers and storage equipment and half built workstations, and I led the half that built workstations. And I'm sure a lot of your listeners won't be very familiar with kind of Dell in the 90s. So it's worth just taking a minute to say when computers were starting to become more mainstream, it was very important for somebody to get kind of exactly the amount of hard drive they needed and the speed of the processor and the amount of Ram and RoM. And so our model at the time was you would order either online or in most cases, through a phone salesperson, exactly what you wanted. We were configured to your needs, and then we would build that custom product in our factory and ship it to you within five days. And so there were some huge cost advantages for Dell with that model. One thing was that inventory in that space, the high tech space, was going down 2% a week. So, literally, it's like depreciating as fast as bananas in a grocery store. And so you had huge inventory savings. Our competition was selling through channels. And so you had all this inventory that was being built overseas, going into stores. So you literally had months and months of inventory that was going down in value. You also had an ability to kind of upsell the customer to maybe get that next faster hard drive or processor, which gave you higher margin and just a lot less kind of overall waste in the system. And so that first job really allowed me to kind of learn how Dell's model worked and understand the financials kind of behind our model. And it is not an exaggeration to say that there were a number of years when I first started Dell, where we literally made more than 100% of the profit of the whole industry. In other words, we were driving pricing to a point that our competition was losing money, and we were making a lot of money. So it was just a hugely advantaged supply chain and model, pairing up kind of a direct sales model with a manufacturing model.
I spent about a year and a half in that role, ramping up this factory and this new line of business that Dell gotten into. And the interesting thing for me was I quickly learned that if I had all the material that I needed to build an order, I could get it through the factory and ship it. And things went very smoothly. And so the real challenge was getting the right material to the front end of the factory. And there was a group of people that we called materials that would get material from the warehouse to the line where you needed it so that my team, the production team, could build the systems. And so I just kind of lived that year thinking, gosh, if these material people would do their job better, my factory would be much more efficient, and my metrics would all look better. And so, as fate would have it, my next job was in materials. I led a really major redesign of Dell supply chain.
We had partnered with a software company called iTune Technologies, as well as Accenture, and we were trying to figure out how to build our first factory without a warehouse. At the time, Dell had something called shared logistics centers, which were really an outsourced place to store material very close to our factories. It was a huge advantage from a supply chain execution and even cost point of view, to have our suppliers keeping inventory that we needed close to our factories that we could pull it in. But the process, when I started at Dell, was to pull it from those share logistics centers into our warehouses, and then from the warehouse to the lines where it was going to be built. We built a new factory, and they decided halfway through design, there wasn't going to be space for a warehouse, but they had no idea how to do that. And so, literally, the concrete had been poured. And I got hired to lead a team of about ten NBAs, plus a pretty large team from Accenture, plus a pretty big team from I two, to figure out how to run a build to order very high speed factory without any warehouse. I led this effort, in addition to leading a team of about 300 people running a larger factory that built desktops next door. So I was kind of have a tactical job of running the materials team for that factory, as well as this more strategic project of how to run a factory without a warehouse. And it gave me tremendous visibility across the company. I was actually presenting to Michael Dell, who was a CEO at the time, and Kevin Rollins, who was a COo on a monthly basis, on the progress of this effort. I was, you know, honestly, most senior executives in the company thought that it was no way it was ever going to work. We ended up coming up with a process that was patented that basically we rescheduled every line in this factory. There were six lines every 2 hours. And based on that new schedule, we ordered the material that we were going to need 2 hours from now. So basically, we're ordering the material we were going to need hours two through four, which gave our share logistics centers 2 hours to pull that material that we needed and deliver it right to the line where it was going to be used. It was a huge effort. It ultimately was very, very successful. It dramatically improved our ability to ship orders in the time committed to the customers. Because we were always shipping out the highest priority orders first, it significantly reduced our inventory. We literally went from probably holding close to a week's worth of inventory to holding about six to 8 hours worth of inventory. So we were turning our inventory like almost a thousand times a year, which is just unheard of in manufacturing. And it saved the company once we rolled it out to every dell factory around the world, about a billion dollars in the first few years that we were operating with that new model. So I got a lot of visibility. It was a great opportunity for me.
[00:11:48] Speaker B: On that achievement there. That's amazing. I just want to just hear a little bit more about it. What was the principal thing that you guys had to figure out in order to be able to do that? What did you guys figure out in order to be able to take a supply chain and make it that real time, where you just have a couple of hours of lead time before you take possession of inventory? What unlocked that ability to run a factory that way? Was that mathematics? Was that the way that you configured labor? Was it a certain set of proprietary manufacturing hardware? Where did the unlock occur to pull something like that off?
[00:12:27] Speaker C: I would say there were three really things that all had to occur simultaneously to make this work, and it was truly a moonshot type of project. Number one was, I too had no idea if their software could do this. They had designed their software to schedule a factory like once a week. I mean, when we said we wanted to schedule six different lines individually every 2 hours, and this was, you were building about on each line, call it maybe 2000 computers an hour. So, I mean, really fast pace and all different components. And it was very complex from an IT point of view to get this project done. And so big effort with ITU and our internal IT team, we had to do a lot of preprocessing and post processing just to get the software to work fast enough to come up with this kind of optimized schedule every 2 hours, that was a big, big challenge, I would say. The second thing was all the processes that supported that. So you were literally designing a software package that there were no processes to support, or you were designing processes that there was no software to support. So they both had to happen simultaneously, and we had to have very high inventory accuracy. So we had to get our inventory accuracy from like 98%, which is pretty good, to like 99.95%. For this really to work well, we had to receive an inventory for each line. So we had to set up a different warehouse location for every line and manage inventory very differently than had ever been done in any company, honestly. Each line was basically treating like its own factory, and that we did have a shared warehouse to make sure that we were reusing any extras across the factory before we ever ordered in new material. But all of those processes of the inventory accuracy, the receiving the material, the making sure that if there was excess, you moved it to a warehouse that moved back to a line as soon as possible. All of that was brand new processes.
I'd say the last big thing was leadership. I was able to get really strong leadership from Michael and Kevin Rollins and from Dick Hunter, which was a gentleman that was leading all operations at the, you know, saying that, okay, I think this will work. Like, we should pilot this. Let's try, you know, again, most people in the company at the time was like, there's just no way this is going to, you know, ultimately, we piloted, and there was definitely some issues we had to work through. But within about two, three know, we were running high volume through this new factory without a warehouse. And my next meeting with Michael Dell and Dick Hunter, they said, okay, you need to roll this out to every factory around the world, and I want you to do every factory with every two months. And there was just tremendous change, management and leadership required. I mean, the team in Europe didn't know me from Adam, and all of a know. Michael was saying, you need to listen to know. And I was very mean at this point. I'm like, two years out of business school, and Michael was, you know, telling the senior executives from Europe and Asia, you need to listen to this guy and go do what he, you know, you can imagine there's a lot of pushback and just getting people to redesign all their processes. It was just a huge effort. But over, literally, I was only in that role less than 18 months. So we went from design to all these resources, working on how this is all going to work, to rolling it out, and to every plane around the world within 18 months. Just a massive, super fun effort.
[00:16:17] Speaker B: So was it over that 18 months that you rolled it out around the world, or was it over that?
[00:16:23] Speaker C: Yeah, so it was about nine months before we brought up the first factory. And literally, we couldn't bring up the factory without this new process. So they were like, we got to bring this factory up on this date. We need the capacity. We've poured all this money in this factory. Are you going to hit this date? And we didn't know. I mean, it was just a big question of, could we come up with a process and it tools to support it in that amount of time? But we brought up the new factory on time, and then there was about six other Dell factories around the world. And Michael said, I want you to roll it out to all the other six in the next nine months. So it was just a huge effort.
[00:17:00] Speaker B: Yeah, that's an incredibly fast timeline to make that kind of change. What did you do to get into the mid to high nines on inventory accuracy? What was the unlock on inventory accuracy and getting that from 98% to sort of high nines? 99.95 or 99.5? What was going on there? What did you guys figure out?
[00:17:22] Speaker C: A few things. So one was we moved from kind of wall to wall counts to perpetual inventory, which was a big change. Dell used to shut down at the end of each quarter, and we'd shut down for at least a full day, if not two days, and the materials team would spend the whole weekend and maybe even a workday counting all the material and then correcting the database to show the new where you had the issues. And honestly, with that style of system, it's pretty hard to figure out why you have the inaccuracy, because three months has gone by between the last count and you're trying to do some sleuthing to figure out why did we end up with this inaccuracy. We ended up moving to perpetual inventory, where you counted very, very frequently, and you did a smaller count more frequently, and we kind of did ABC counting. A is your most expensive parts, b is kind of medium, c is your least expensive. And then the other big thing we did was we made it part of every member of the team's job to be an accurate counter. And so when we did counts, it wasn't the materials team owning it, it was the entire team. Production, shipping, you name it. And we literally made it part of their performance plan that they counted accurately. And we did double blinded counts to make sure that you got the same answer from both. And if somebody couldn't count accurately, it hurt them. And so it became motivating that I'm going to do a good job and I'm going to have high accuracy for my line, which really just changed the incentive system. High accuracy went from being something that the materials and the inventory control people are responsible for and nobody else in the factory really cared about, to something the plant manager and everyone throughout the organization deeply cared about.
[00:19:06] Speaker B: It'd be great to hear a little bit about just your own leadership development over that period at Dell. I can't help but know, what did you learn from Michael Dell himself? And I remember Kevin Rollins and he were a pretty dynamic duo back, you know, if there were other really influential leaders there, please include them as well. But must have been a great experience to stand and deliver in front of Michael Dell every quarter, every month. Whatever your cadence was, it'd be really interesting to hear what you learned from him and from the other top brass over there.
[00:19:36] Speaker C: I learned so much at Dell those first five or six years. It was just an incredible, incredible opportunity. My plant manager at the time, his name was John Egan, great leader. He's now a very senior executive, I think, with Lenovo. Dick Hunter went on to be one of the most senior leaders in all of Dell, and retired, I think, in his mid 50s, because he could. And I was surrounded by just a fantastic group of executives. One of the advantages of going to a company that's kind of that famous at the time was you had your pick as far as recruiting. So we were growing so rapidly, but we just were getting great talents. And I worked with some of the best people of my life, honestly, at that time, and I still leverage that network to this day. But I'd say some key lessons were just incredible transparency. You don't drive major changes by kind of hiding the ball, you know what I mean? You just say, here's what's working, here's what's not working. Here's where I need help. And so I was incredibly transparent with everybody that I was working with, and I think I was kind of rewarded for that, but that's just kind of my nature. Rewarding risk taking. Michael very much is a leader that I think rewards risk taking. And I feel like even if my project had not been successful, I wouldn't have been crucified. You know what mean? Like, I was taking a huge risk. I was empowered and supported with all the resources and everything I needed to be successful, and I had this knowledge that, look, this is a very entrepreneurial company, and if this ultimately doesn't work, I'm not going to be fired the next day because of that. And then the other big thing I'd say for me, coming out of the military, I flew off aircraft carriers, so top guns, the sequel, is now out. Honestly, that was kind of my lifestyle. People probably think those caricatures are all made up, but honestly, that was pretty similar to what I experienced when I was in the Navy. I was more of a bomber than a fighter guy, but I actually flew the f 18. My last two years, and I went through incredible training in the Navy, but I kind of came out of the Navy with, I would almost call it, like, the Iceman image from the first movie where he was just like, this block of ice and incredible pilot. That's Val Kilmer for people that are watching the second movie only. But I had this kind of mask that I wore that was this iceman image, but it really wasn't the true me. And I learned through those first few years at Dell that I would be much more successful if I was just completely authentic. I was pretty brash, quite honestly, and I think I definitely hurt some relationships because of kind of that brashness. And particularly when Michael empowered me to go roll all these new processes out and software around the world. Here I was, like, 32, 33 years old, telling 55 year old people what to do, and I could have done a lot better job at that. And I think as I kind of removed that mask and became more authentic, I became more successful. And it was a great leadership lesson for me.
[00:22:34] Speaker B: Did you get coached on that while you were there, or did you sort of grope your way into a more compassionate posture of leadership just because as you were breaking glass, flying around the world, you sort of realized, hey, this approach isn't working as well? Or was there someone who sort of pulled you aside and really coached you up on this?
How did you ultimately learn to take off the mask and bring a different version of yourself to the leadership arena?
[00:23:03] Speaker C: I got a tremendous amount of. So one of the best advantages, and I guess you could probably point to this and say I was a poor leader and I needed it. But Dell, in my first year, hired a leadership coach for me. It was something that we really believed in as an organization, not typically at the level I was, but I think the more senior leaders saw that I had potential, and so they hired me a leadership coach that had been basically, like, coo of, I think, digital or HP, but like a really big competitor, and then gave that up and got his phd in psychology and became a full time coach. And his name is Murray Francois, and to this day, he's an incredible friend of mine. And he retired from coaching probably 15 years ago, but still coaches me on just a pro bono basis because of our tight relationship. So he coached me tremendously. And then Dick Hunter. Dick is, he'll poke you in the eye if you need it. And sometimes that doesn't feel great at the time, but in hindsight, it was exactly what I needed, and I'll never forget. I mean, there was a meeting where, again, I was still young and I made a comment. And one time he coached me and said, you made a comment that in my experience, this is how something works. And he said, quite honestly, you don't have enough experience to make that comment. Like, you should not make that comment anytime soon because you're just learning kind of the civilian world and you've only been here a few years. That's just going to rub people the wrong way. And another time I made some sort of, kind of probably brash comment, and he just leaned over and whispered, he didn't do it in a huge setting, but just said, that comment added no value, and I'll never forget it. He was constantly coaching me on ask questions, don't tell people what to do. Ask the right question. You're going to be much more successful as a senior leader if you think about what question you need to ask versus trying to tell people what to do. And that was just a fantastic leadership lesson.
[00:24:59] Speaker B: It's an incredible chapter that you had there. And I want to come back to manufacturing before we wrap up, because I want to hear your thoughts on manufacturing in America today relative to then what you would hope to see and what you think is potentially possible for american manufacturing over the next ten to 20 years. But before we come back to that topic, it would be great to just quickly hear, how did the chapter close at Dell? And then we can dive into LFM a little bit. I know that you spent some time at another investment firm before starting LFM, but what an amazing ride. Why did you decide to get off the rocket ship, and how did that happen?
[00:25:39] Speaker C: Yeah, so what happened was that the technology price kept coming down, and so the technology got to a point where it wasn't really an advantage to be able to give a customer exactly what they wanted. The difference in price between this hard drive and the next bigger was just so small that you put the bigger hard drive and everything, and the faster ram and everything, and you still sold a different processor speed. But all the advantages that made Dell so successful started to deteriorate. And so over time, Dell decided to really outsource all manufacturing and almost all manufacturing and move it offshore. And honestly, I think at the time, it was made too quickly, and it was like a zero or one type decision that Michael made. And I think it was more nuanced than that. But once I ended up transitioning to sales and led about a 600 person consumer sales organization, which was a great, great thing for me from a career point of view, and I think I successfully made that transition. But at the end of that job, I just looked and said what made me passionate about Dell was the manufacturing. And really that's not here anymore, that's been outsourced. And the company had gotten a lot bigger and quite honestly more bureaucratic. And just with that comes kind of politics and stuff like that. Michael Dell was my second level manager at the time, and I just know if I'm not that passionate about kind of what we're doing anymore, and I'm not having as much fun from a risk taking and just team point of view, let me go try something new. At the time I was recruited heavily to be coo of a very manufacturing oriented business called mfG.com. When you work at a big company, you think the sexiest thing in the world is working at a startup. And it was a venture capital funded startup. And so I jumped at that opportunity and I quickly learned that that's not me, I'm not a startup guy. And so I got into private equity a year after that. And I've absolutely loved private equity. It's definitely been the best career move I ever could have made.
[00:27:41] Speaker B: Yeah, fantastic. I mean, I'm excited to talk about think, you know, particularly because you've chosen to focus on small manufacturing businesses on a relative basis. And while Dell was big and growing at the time, it was small relative to what it became and what it has become. Let's talk about manufacturing businesses and what excites you now. I mean, in the lead up to this conversation, I said it'd be great to hear, what does the Steve Cook of today get excited about in the world of manufacturing? What are the defining features and characteristics of interesting and exciting american manufacturing companies for you today? Love to hear about that.
[00:28:23] Speaker C: Sure. So first of all, I have to share a story. So I was heavily recruited in 99 by a guy now who's a very good friend named Jeff Wilkie, who was, he rose to be second in command at Amazon. We had this debate over a beer, honestly, about what was the future of us manufacturing. And at the time I was pretty passionate that wage rates around the world were going to kind of equalize to a certain extent that would remove some of the advantage of moving things offshore, and that tax rates would. And honestly, when Dell moved manufacturing, it was 100% to do with tax, it had nothing to do with wages. Most Americans, I think, get kind of sucked into thinking that it's all about somebody in China making a dollar an hour, and that's really not the reality, particularly nowadays. And so I think with the effort that's going on right now to kind of equalize tax rates around the world and wage rates reaching a quasi equilibrium, and they're not dollar for dollar the same, but they're definitely to the point where things are flipping back. And so that was what I argued literally 20 years ago with Jeff Wilkie. And I'm happy to say that I think I called that one accurately. The pendulum is definitely swinging back. And I think the end state, in my opinion, is you manufacture closest to where the customer is located. And the reason for that is it reduces the most non value added transportation. And it's the best thing for the know. Shipping stuff from Asia to here, to be consumed here with all the packaging that's required, is hugely inefficient. In fact, I studied. Just a quick thing that I'll share that just blows my mind to this day. We did due diligence on a company that makes tombstones, and they actually cut their own granite. Most of the granite for tombstones is manufactured or cut in the US. There's one place kind of mostly in Georgia, and believe it or not, they were cutting the granite, shipping it all the way to Asia, where it was cut into the tombstone, and then shipping it back. I mean, just think how horribly inefficient that is. But that's just a good example of material, too. Yeah, super heavy, very expensive to move. That's the kind of stuff that I think there's no place in the future world for. I think you're going to manufacture much closer to the point of use. And that's really kind of what we're investing into a certain extent. And what gets me excited is it's all about the people. Our firm is a small firm. We're 18 people now. The three most senior people in the firm all went to that same program at MIT. So all three of us are engineers. All three of us have business degrees on top of that. And we're just a very kind of operationally focused, collaborative firm that wants to find a business owner that really cares about their legacy and wants to sell to somebody that can take their company to the next level and not shut it down or fire a whole bunch of people or something like that, and has a network of access to talent that can really bring in some outstanding leaders. Why I always coach and mentor people that I mentor is to go into manufacturing, is that it's the area of business where early in your career, you can lead a large team and really cut your teeth on what it's like to lead a large team. If you want a very successful career in almost any field, that's going to come down to leadership. And in manufacturing, you can lead 100 people. When you're 28 years old, you're almost never going to do that in marketing or sales or finance or something like that. We invest in companies that are 350 people or less. The reason for that is that myself and Dan Shockley and Ken Huffling, we all manage teams from ten people to multiple thousands in our careers. I managed a 2400 person desktop manufacturing plant for Dell. And we all found that when you got above about 350 people, it requires a different style of leadership. You're not going to know everybody's name, you're not going to build a personal relationship with everybody. And so we feel like from an investment point of view, we can have the most dramatic improvement in a company of 350 people or less if we're bringing in new leaders as part of a transition with a seller. And so that's typically what we do. And we're very passionate about partnering with that go forward leadership team and really taking the company to a whole new level. I mean, people would look at our backgrounds and think we're going to be very focused on really cutting costs and squeezing out every dime we could out of manufacturing. And look, obviously if we can lean out manufacturing, that makes sense. That's going to give you more margin or at least an ability to lower your price and grow your market. But we spend most of our time trying to figure out how to grow the top line and very focused with the management teams on how do we dramatically grow the top line, solve more problems for customers, get a greater share of wallet, maybe take something that was very successful in one region of the country and move it to the whole country. But it's a lot of fun. I mean, I love small teams. I absolutely love the team that I'm working with here at LFM. And private equity is just a blast because you're constantly learning about new industries. One of my favorite tv shows is how's that made? Which is all about just getting into the nitty gritty of how something's manufactured. And I kind of live that on a day to day basis. It's kind of like my life is half the profit and half how's that made? All rolled up together.
[00:33:43] Speaker B: Yeah, those shows are good. Those shows are in many ways better than.
They keep my attention a little bit better than shark tank does these days.
[00:33:52] Speaker C: Yeah, I want to talk a little.
[00:33:53] Speaker B: Bit about businesses separate from management teams and leaders. But before we get to businesses in the manufacturing category, can you provide just some specifics on what you're hoping to find in leaders of your businesses? I mean, when you recruit a new CEO, or when you back an existing leader, or back a management buyout, or what are the traits of a person that make you really excited to work with them, that give you a high degree of confidence to bid aggressively for a business and try and win? Be the partner of choice. What are the things that you just get really excited about when you see it in a manufacturing leader today? You've got so much experience now as an operator and now doing a bunch of different deals. Where have you landed in terms of just the traits that you want to see in the talent or the traits that you want to try and develop in your leaders?
[00:34:43] Speaker C: So I would say a lot of the things I learned early in my career. So definitely really look for authenticity, someone that's very genuine and is going to connect with people throughout their organization. I always kind of use the analogy of the keys of a piano. It's easy to find someone that can play the low notes, which would mean, like, they can roll up their sleeves and get on the manufacturing floor and bond with someone that's making $17 an hour. And it's easy to find someone that can put a great strategy together and speak at a board meeting and lead the executive team. But to find someone that can play all the notes on the keyboard is actually pretty rare. A lot of times you'll find someone got the experience that you're looking for, but they gotten to a point in their career where they're unwilling to put a PowerPoint together. They're unwilling to do their own spreadsheet. They're not willing to go out on the manufacturing floor and help paint the factory because we're trying to clean the factory and give it a whole new appearance. So somebody that can bond with people at every level in the organization is really important. You have to take for granted their ethics and their values. Obviously, if I have any doubt about someone's ethics or values, that's a showstopper and someone that's coachable. I've met a lot of people in my career that maybe they weren't the greatest leader when I met them, but they really took coaching well and they were appreciative for coaching, even if it was painful at the time. And they are now fantastic leaders. And so somebody that's coachable, how do.
[00:36:09] Speaker B: You test for coachability? Like, where have you found yourself? Maybe trying to figure that one out. Because the reason I ask know, just hearing about your own biography at Dell, right? You didn't walk in the door at Dell with smooth corners around all the edges and you went through a process with a coach and with Dick and I'm sure a bunch of others, but they clearly saw a lot of potential in you and from their perspective, it was worth investing in developing you into that future state that they saw was possible. So I'm curious how you think about talent that isn't fully formed yet in terms of its ability to play the full keyboard and be interpersonally effective in a whole range of settings. How do you try and scan for that, particularly when you're in a deal process?
[00:36:56] Speaker C: In a deal process, when we're trying to evaluate the leadership team, unfortunately, a lot of it just comes down to our gut reaction on our interactions with people with probably almost 30 years, more than 30 years of experience now. I mean, my gut is pretty good when it comes to evaluating talent, but I can't really give you a formula other than just, I will tell you that really salesy people and I absolutely value great salespeople, so don't take that the wrong way. But if they come across as super salesy, that can be a little bit of a red flag that getting to that authenticity is going to be hard to get to when we're evaluating people that we're bringing in from outside. In most cases, that is a relationship type hire where one of us has worked with the person before. So then you have the benefit of the knowledge of how they work and are they coachable and what did people think about them. We do reference calls, of course, like anybody would, but we're really asking the questions about those types of things, like how coachable is this person. And then we typically do anonymous surveys once we've closed a deal to get feedback for the leader and give them that feedback. And you can tell in the first six months to a year how someone's going to take that feedback or not. I mean, if they start squirming in their seat, when you say, hey, we're going to do anonymous survey of all of your direct reports and we're going know use that to put together a package that will be able to give you better feedback. If they don't like the thought of that, then you probably have a little bit of a problem there.
[00:38:25] Speaker B: Yeah, well, let's just quickly cover businesses and then maybe we get into a deal before we run out of time. There's a Buffett quote that's something goes along the following lines. When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. And so obviously finding great leaders that are already in the seat or that you can put in the seat, obviously it's a key part of the private equity business improvement and value creation process. But what do good manufacturing businesses look like today? What defines them? Are there different business models that are particularly effective today?
Dell had this incredible business model at the time that was totally pioneering. Incredible working capital advantages, inventory efficiency, inventory turnover at levels that had just never been achieved. I think at that scale before, maybe. Where is the advantage now in manufacturing from a business or business model perspective? Or what are the types of advantages that you like to see and that are compelling?
[00:39:33] Speaker C: Well, honestly, I mean, my private equity career has brought me back to my Dell roots. I really like to see companies that build stuff to order, and it doesn't have to be 100% built to order, but in the current environment, if you're building commodity like product, you know what I mean, where there's competition, that you're basically competing on price, that's going to be a race to the bottom.
And also, depending on kind of the economics, potentially something that could be manufactured very economically offshore, and something you're going to struggle with in a us company. So we like to see strong engineering talent as part of the team. If they've got 300 people, if they've got 15 or 25 engineers on staff, we like that quite a bit. We like when they are competing on lead time and quality versus price. And we like when it's some sort of custom nature to the product. Pure custom companies where you're really a job shop, those can be hard as well, because it can be very hard to quote and it can be hard to manage your backlog. But there's a sweet spot of companies where, either through experience or just the nature of the product, they've gotten really good at figuring out how to take this from this past project and that from that past project and something from another past and put them all together. And now it's still a custom offering, but they've done all three things before, and so they know how to quote it and they know how to put it all together. Those are really attractive businesses because you get the kind of compensation for being a pure custom product with the engineering talent that's needed to make that happen. But you get kind of the economics of not pure custom. Learning everything for the first time, right?
[00:41:24] Speaker B: You can drive scale and modularity.
[00:41:27] Speaker C: Right.
[00:41:27] Speaker B: Sounds like Dell.
[00:41:28] Speaker C: Yeah, no, it's a lot like Dell. We also like companies where you don't need a ton of capex because obviously in private equity, that's going to hurt you, and where you don't need a ton of inventory. Pretty low net working capital, pretty low capital. Although we are willing to make big investments in capital if it makes sense. I mean, automation in the US manufacturing economy makes a ton of sense. So we have one investment that we wrote probably about a $12 million equity check, and we ultimately invested 15 million in capital in the first three years. And we knew going in we were going to do that, but it was a smart decision to do it.
[00:42:06] Speaker B: Was that 15 million largely in the form of capital asset automation, or was it?
[00:42:12] Speaker C: Yeah, part of it was we bought a company that had been under capitalized and had very old equipment that was almost not maintainable anymore, but a lot of it was automation and just dramatically improving efficiencies.
[00:42:25] Speaker B: Well, we said we were going to talk about a business that you had bought, and that was a great journey for you in one way or another as an investor. Operator turned investor, and probably a success story in some exciting ways, not just at the IRR level, but successful in terms of how it shaped you as an investor. Let's spend a little bit of time on that. What transaction would you like to go through and share some details on?
[00:42:50] Speaker C: Yeah, so I think fecon is a great example of a company that I think really allowed us to shine in the ways we uniquely can. Fecon manufactures equipment that does in place mulching of trees, which is great for the environment. Much better than cutting a tree down with a chainsaw and then burning it, which is typically what's done. But if you're trying to clear some land or maintain some land, like the right of way where power lines go, you're constantly having to deal with trees that grow up, and they make these heads that go either in a skid steer or a backhoe. But basically it just pulverizes a tree and turns it into toothpicks in about 30 seconds. It's credible equipment. We knew a decent amount about that because Ken Huffling and Dan Shockley, two of my colleagues, had both had extensive careers at Caterpillar. And this equipment, a lot of times goes on caterpillar equipment. Ken had actually run kind of the small machine business for Caterpillar before he left there and joined our.
You know, these are all kind of small machines that this is going. You know, you said just a few minutes ago, you have to get the right industry and the right team. I think we really did a good job in this case of getting the right industry because of our knowledge about it. Very much a growing industry because people are adopting this newer technology and realizing that it's cheaper and better for everybody if you mulch in place versus cut down and burn and deal with stumps. And then it was all about the people. And so the seller was decent ownership across the leadership team, but the primary owner was the CEO and he wanted to retire and invest in vineyards, which he has know. We knew that getting the right new CEO was going to be our biggest hurdle. And through kind of the relationship with the seller and Ken Huffling, we found a great leader and a gentleman named Bob Deekman who came in. We also inherited a fantastic leadership team and we were very excited about that as we got into the deal. And over a period of about four years, we got rid of one business that really wasn't core. We did some add ons that really dramatically improved our penetration with dealers, which is where most of this equipment is purchased. We took our ability to purchase spare parts and even units online. So kind of meeting customers where they wanted to go. Some customers wanted to buy online, most wanted to buy through dealers, some want to research online and then go to a dealer, but basically just changed our sales channel to enable whatever our customer wanted to do. And we put a big effort into increasing kind know sales year on year with all of our existing dealers, which had not been a focus previously. And Ken did a fabulous job working with the leadership team to put together a very detailed operational agenda before we closed and got the team's buy off. The go four leadership team's buy off that, yeah, this is the right strategy. We're very excited to pursue the strategy and we pursued that strategy honestly to A-T-I mean, if I pulled out that document that was put together before close with kind of everything we did, it was almost an exact match. And we, over a period, like I said, of just over four years, grew EBITDA by more than triple. We ended up because of that, being able to sell for a much higher EBITDA multiple than we had acquired. The company showed really well when we sold it. We had invested in automation and really fixed up the factory and improved sales and marketing and just a great story all along. I mean, it was honestly a company that was hard for us to sell because we just love the product and love the management team, but felt like it was in the best interest of lps to do so. And it ended up being just a great return. I mean, I can't give you the exact, but it was more than a five multiple uninvested capital and I think, gosh, probably more than like 65 or 70% IRR. So a very strong return.
[00:46:58] Speaker B: When you look at that sort of transaction and the story and the work pre transaction and post transaction, I mean, obviously the outcome is great. But does the fecon business and your stewardship of the business, does that represent an example where LFM and you all kind of brought to the table?
Was that just an opportunity for you guys to deliver a lot of expertise that you already have? Or did you guys go on a journey yourselves with that management team and learn a bunch of new things yourselves along the way? I'm curious sort of whether that deal or other deals were big learning moments for you as investment professionals, or whether those were just sort of like, we understand this business, we know exactly how to do something great with this company and we're just going to run the play. I'm curious how much was new and how much was just in this case. We really know how to be helpful here.
[00:47:58] Speaker C: There was definitely some significant new learning for us. I mean, I would say there was definitely some, hey, we knew kind of what play to run and we had the right expertise and the right kind of willingness to collaborate with that leadership team. But this was the first deal that we put a detailed operational agenda together for before close, and definitely that's become our playbook. That was a huge lesson learned that having that well thought out and getting buy in from the go forward leadership team was just critical. There was no surprises after close.
And then also, I would say, being willing to pay up for a great leadership team and a great industry, we paid more for that company on a multiple basis than we'd ever paid before. And honestly, I'd say we took a big risk. We have a policy that we only offer co invest to our existing lps unless they don't take it. And we offered the co invest in that deal to all of our existing lps and none of them took it, which is a pretty strong signal. And I got some feedback that, hey, you guys are paying a much higher multiple than you historically paid. We're very nervous about that. We were fortunate that two new lps that were joining in a fund that we were just closing wanted to co invest, and so they took it. And of course, the existing lps have come back to me now and said, boy, I really wish I would have took that co invest because that was an incredible deal, and you guys did exactly what you said you were going to do, but it just was a great lesson learned that there's no small range that you should be willing to pay for a company. I mean, every company is different, every leadership team is different. And you really need to value a company based on all the different dynamics at play. And this was a situation where we got high conviction about the product and the leadership team, and we paid a higher multiple than we were comfortable with, quite honestly. And it worked out really well.
[00:49:49] Speaker B: Yeah, I mean, ultimately, you got comfortable with it, right? How do you think that happened? I mean, how does that happen?
[00:49:56] Speaker C: Well, success definitely breeds more success. The fact that it turned out so well is an explanation point. But at the time, how I got comfortable with it was my own conviction about how strong Dan and Ken are and how passionate they were about the, you know, I was not the expert, but I had total trust in the two of them, and they were super passionate about it. And honestly, I had to go carry the flag to our limited partners, and I felt like I was taking some body shots because they were like, no, I don't want to do that. Co invest. And I was like, I went back to the team, I was like, we better be right, because if this doesn't work out, this could be a career limiting move for all of us.
We had high enough conviction that we went, no, we said, we're going to do this. We know what we're doing, let's do it. And it worked out extremely well. That one deal returned more than the entire first fund. So it was a great first deal, one of the first deals.
[00:50:55] Speaker B: That's a great story in a number of ways. I think that one element of that story that I hope a lot of people take away from it is there's a very strong narrative, and I think it's there for good reason, that the private equity industry earns profits by buying businesses at discounts to value bottom feeding low prices. Whereas the venture industry, where you only spent a year on the operating side, they're happy to pay large multiples of forward sales as a proxy for future discounted cash flows far, far into the future. And there's a huge dichotomy between the venture business and the private equity business on how they think about valuation. It's interesting to see a case in point where a private equity investment firm gets comfortable really paying an outsized valuation and is ultimately really well rewarded for doing that. I think the more of those stories that can make their way into the world of private equity. I think the better the overall reputation private equity can probably stand to cultivate.
[00:52:03] Speaker C: I totally agree. And I would say I think what's important is having your own conviction and having skills and experience to back it up. In general, I'd say there's a fair amount of ego in private equity, and some of it is I'm just the smartest investor out there. And if I say it's a good investment, it's a good investment, and that can be a little hard to take sometimes. But I think we were very fortunate to have a great set of unlimited partners. They really have been great backers, and we've kind of earned their backing, but we did it after the fact. We've now kind of started delivering some results for them.
[00:52:42] Speaker B: Yeah, that's fantastic. That's great story. Before we wrap, I'd love to just talk a little bit about manufacturing. You've already touched on it a little bit, the idea of ideally having manufacturing occur as close to the customer as possible. But could we zoom out even further than that and just sort of talk about manufacturing in America? What is the opportunity there through your eyes over the next, it sounds like you and Jeff Wilkie, who's gone on to start rebuild manufacturing, which is a business I'm a little bit familiar with. Sounds like you guys had an argument 20 years ago about sort of where things were going. If you and Jeff were to get together today and tangle on the same topic about where things might go over the next 20 years, how would you answer that question, and where do you hope to see it go over the next 20?
[00:53:29] Speaker C: Sure. Yeah. And I guess just one clarifying. I'm not sure Jeff was vehemently disagreeing with me, but I think he was reading the tea leaves of what was happening at the time probably better than I was understood. But I think we're both totally aligned today. That, first of all, look, I'm very patriotic, and I think to have a successful economy for all people in our country, we need a strong manufacturing base. I mean, if you look back to our history, when we were most successful, we had great middle class jobs that people could raise a family with, and manufacturing was a big part of that. And so we went through a period, I think, as a country, where we kind of led ourselves to believe that we could outsource all our manufacturing. And we have this total services based business economy. And the reality is the services have to be kind of more the top of the pyramid. You have to have a bottom of the pyramid that's generating the wealth I had a great mentor early in my life, and he said, look, if you're not mining it, manufacturing it, or farming it, you're not actually creating value. Those are the things that create value. And there's other things that people that don't do those things. Don't take that the wrong way. Like if you're a financial advisor, you're creating value. But somebody kind of at the bottom of the pyramid has to be doing those things, in my opinion, to have a high functioning economy. So I'm really passionate about manufacturing in the US. I think that natural forces have brought things back and you're going to see that continue. I think there'll be more automation, so there won't ever be as many jobs on a percentage basis as there were in the 50s. But I think having manufacturing in the US is really important. And I think from an investing point of view, there's these great companies out there, many people trying to retire, people that founded baby boom generation that founded these companies, and they don't have a great exit. And a lot of private equity firms look at manufacturing as not very sexy. But from a financing point of view, you have great assets that you can help leverage honestly, group of people that are typically pretty hardworking and kind of salt of the earth type people in general. And if you can get your arms around the business, I mean, this isn't like the next high tech gizmo that might or might not make it. This is like stuff that we all need day in and day out. And maybe not the sexiest things in the world, but the profits are pretty sexy. And particularly if you have some custom nature to it, people are willing to pay for that custom nature to get exactly what they want.
[00:56:04] Speaker B: If you were an appointee to a president running the nation, and you were the manufacturing sort of cabinet member, do you have one or two policy ideas that you would be recommending or just any ideas that would move manufacturing back to America in a way that you think is the right way for America to be thinking about the issue, both from a national security perspective, income distribution perspective, a job creation perspective. Just how would you wave a policy wand if you were in that position?
[00:56:36] Speaker C: Well, number one, I would say, I think the biggest issue that us manufacturing faced in the was tax. And we have to be very transparent that our tax policy drove people to move jobs out of our country full stop. And so I would definitely be very supportive of this treaty that we've signed and actually getting that passed into law. It's got to get passed into law. Everywhere but leveling the playing field. Either you need to tax people based on where they live and give up on taxing corporations, or you need equal taxes on corporations around the world. It's just too easy to pick up your flag and move it. And I had a dell, actually, the CFO for Dell at one point told me I will move manufacturing every single year if I need to to get the tax advantages. That's how big the tax advantages were. And so that is a key piece, I would also say, on unions, our current president is very pro union, and I'm not really pro or against union necessarily, but I would say I think good leaders don't need unions to do the right things. If you need a union to convince you to pay your people a fair wage and a competitive wage, you're a bad leader. If you need a union to convince you to focus on the safety of your people, you're a really bad leader. And so I think the government really should stay out of that. And I think that unions will form where they can add value and honestly get rid of bad leaders. But unions have some negatives, too. I mean, they can become very political. The union stewards and union leaders are kind of living off the wages of other people in the company. And in my opinion, ideal world is to have a leadership team that's very sensitive to being the best leaders they can be so that their team doesn't unionize, but that they pay the same wages and the same benefits and the same better than a union could even get their people. That, to me, is best for the economy and best for people. When you have to negotiate a union, it just creates kind of us against them mentality, which isn't the best to like. Let's be a team and figure out how to make our company most successful and pay everybody fairly.
[00:58:57] Speaker B: Steve, this has been great. I've learned a ton. Really enjoyed the conversation. Such a cool career. In many ways, it sounds like you're only just getting started. Congratulations on. I guess it's fund number three now that's closed with LFM capital earlier this year.
[00:59:12] Speaker C: Yes, sir.
[00:59:13] Speaker B: Really wish you guys tremendous continued success. It's really been great to have you on. Thank you for giving us this time.
[00:59:20] Speaker C: Yeah, you as well. Thank you so much for the time.
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