Building Wealth Through Business Acquisitions feat. Nick McLean

The greatest predictor of whether a company is going to grow is whether or not they actually have growth as a goal. First, we just start with a conversation. It always starts with a conversation. We're not just going to show up to the quarterly board meetings and shake hands and, you know, hope to hear everybody say how great we are. We're going to build relationships with the companies that we acquire, as well as the people that are working for those companies, and try to work together to form a stronger team.

And how is that different from other firms in your space that are maybe doing it different than you guys are doing it? How do you contrast that with maybe other strategies.

What I would say is at Four Pillars, we are entrepreneurs. We're not spreadsheet jockeys. We're not financial engineers. We are looking at businesses. We are not just looking at computer screen. We're getting out there, we're meeting people, and we're wanting to hear the story because we care about our personal story and we care about the personal stories of the entrepreneurs and whose businesses we ultimately try to acquire.

Hello, future billionaires. Welcome back to another episode. Got a really fun episode today. I interviewed Nick McLean. He is with Four Pillars Investors and he does private equity. He is a buyer of businesses. And we've talked about this a few times in the show in the past from different angles. We've talked about franchises. We had a broker on to talk about how to maximize the sale of your business. This is an area that I think is really important for people to learn about because this is usually a core holding of ultra-wealthy investors. And there's a lot of ways you can do this in private equity. It's kind of a broad term, but Nick, he shares about his approach, how they find businesses, what they look for, how you improve value you from an investor, like what are the things you want to look for when you're investing in these types of businesses. And even before that, he talks about entrepreneurs that want to be entrepreneurs but don't want to start something from scratch, how buying businesses is a great way to jump into entrepreneurship very quickly. But then at the very end, he talks about how to make your business attractive to private equity. And a lot of our listeners are business owners, entrepreneurs, and at some point they might want to sell the business. And so it's really important to understand one of the things to be thinking about. He's written a whole ebook that we linked to that you can read, and he shares the most important decision that you will make when doing that and looking to sell your business. So you definitely want to listen to the end to hear what that single most important decision is in that process. So with that, enjoy this show. This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Welcome back to another episode of the Invest Like a Billionaire podcast. I'm your host, Ben Frazier, and today I've got a really awesome guest, Nick McLean of Four Pillars Investors, and very excited to have him on the show talking about private equity. So this is a topic that, you know, we hit on from time to time. Obviously you've probably heard of real estate private equity. You know, there's multiple subsets in private equity and Nick is actually buying businesses. And so this is something that is maybe a little bit unique or different than a lot of what our investors are doing and investing in, but it's an area that a lot of sophisticated billionaire investors, ultra-high net worth, are investing in. And a lot of times pretty significant allocations of their portfolio. And so to me, it's something I always want to highlight whenever we have a qualified guest to speak on it because it is something that has been kind of a core investment strategy for a lot of big investors for a long time. So we're bringing on Nick McLean. I've actually met Nick, probably we're trying to figure it out, probably almost 8 or so years ago. And both here in Kansas City. It's really fun to kind of come full circle here and have a conversation with him. But Nick, for those that don't know you or Four Pillars, give a little background on yourself and what you guys have been doing with your investments.

Well, I'll certainly not try to bore your audience with too much background info here, but, you know, just because, you know, they might, might like to hear the story of an entrepreneur, if you will. I'll go back a little bit. You know, I always thought that I was going to work for a Fortune 500 company for 20 or 30 years and hopefully rise through the ranks and retire and get the gold watch or get the gold watch and then retire, you know, whichever happens first. But you know, when I was in grad school, got exposed to private equity, investment banking, really got exposed to companies in the lower middle market. And even though I wasn't aware of the term at the time, there's a term that has been popularized since, which is called entrepreneurship through acquisition. And that's really the flavor of entrepreneurism that resonates with me because I'll be honest with you, I'm not the guy that has an idea for a better mousetrap or a killer app. But I still consider myself an entrepreneur. And where that took me is that I had some of these jobs and I never really had a seat at the table. And I knew that if I wanted a seat at the table, I was going to have to build the seat. I was going to have to build the table. And that's really how Four Pillars Investors got launched. My partner and I decided we wanted to buy two businesses, one for me to run, one for him to run. We bought the first business in 2016. Bought the second in 2017, which my partner ran. He moved from the Kansas City area where I still am to Portland and has been running at that ever since. Now back to the first deal that we bought. I ran that for about a year or so and then got introduced to, to some potential acquisition candidates to potentially perform a rollup if it made sense. Well, I, I won't go into all the myriad reasons why that didn't happen. But through that process, what I realized is that yes, I'm an entrepreneur, but I didn't just want to run any type of business. I wanted to run a private equity firm. And even though we had already established Four Pillars, it was at that point we made a shift from buying businesses for myself and my partner to run into more of what's called an independent sponsor, which is a type of private equity firm that raises capital on a deal-by-deal basis.

Very cool. So I love what you're saying there, 'cause I think a lot of people have an idea of what entrepreneurship means, right? I have to go come up with the crazy, you know, brand new idea and have a big app and go raise, you know, $50 million of venture capital and then eventually go public on the stock market, right? That's what's been glamorized in the media. But what you're saying is you can actually go and buy lower middle market businesses and there's some pretty cool options from, you know, a leverage standpoint with the SBA program and other programs to actually become an entrepreneur through acquisition. So talk a little bit about that journey and what that really looks like as you're kind of walking down that path to be entrepreneur by actually buying a business?

Well, I will tell you, I can't say that I walked down that path because walking implies laziness, or you know where you're going to get, or those things. Really what I would say is I took a seat on a roller coaster and luckily my belt was fastened enough and it didn't throw me off. The reason why I say that is just because whenever you're working on a deal, whether it's an SMB, small-medium business deal, or even a larger deal, there are thousands of, I mean, infinite really number of reasons why deals can fail. Throughout my 10 years of running Four Pillars, I've talked to countless people who've told me, hey Nick, I've been successful in my career, or I'm just getting started in my career. I really want to buy a business. The number that actually end up buying a business is, is very low. I, I don't, I don't have stats, uh, for, for my own personal interactions, but I've, I've heard it's something like 10%. And for the right person that's going to be persistent, that's going to be able to handle all the ups and downs, all the uncertainty, all the, quite frankly, disappointment, it can still be a good option. But I will tell you, it is not for the faint of heart. You know, one thing I always tell folks about this is my wife used to always ask me about how's work going, how's this deal going? No more. She says, don't tell me about a deal until you're sitting at the closing table. And I tell you what, she learned about M&A pretty quickly to be able to make a comment like that. I'll tell you what.

That's so funny. Yeah, I'm probably similar, but with my wife, it's like, you know, just, Just tell me something significant is going to change, good or bad, and I'll just kind of be in the dark in the interim. But no, that makes a lot of sense. And from my standpoint, people heard that they busted for a while, but I used to be a commercial lender and did a lot of SBA financing and actually could finance the acquisition of businesses through one of their programs. And it was pretty neat because most lenders will not lend unless you have hard collateral. And there are businesses you can buy that are collateral-based, but generally there's going to be an element of goodwill, quote unquote, which is an accounting term for the intangible value of a business that you're buying that isn't necessarily saleable on a secondary market that like a real estate is. But the cool thing is a lot of entrepreneurship, and when I was a lender, I forget the exact stats, but the percentage of businesses that are new startups that end up failing in the first year of business and then within the first 5 years of business are pretty staggering. I forget the exact numbers, but it's at least two-thirds of new businesses that are starting. So the risk of it not working out is pretty high. It's definitely not in your favor, right? It's worse than 50/50, but You know, through acquisition, you're buying an established business many times. A lot of times a business where an owner has kind of taken it to where they can take it, or it's become a lifestyle business where they've gotten to a certain point where they're just kind of comfortable with where the cash flow is at. They got the customer base built out, but they're not really interested in growing it, and they're leaving a lot on the table potentially. You now can take an existing proven business model with proven client base, acquire it at a pretty good value and then grow it from there. And the risk, you know, from my perspective goes down a lot, right? And has that been your experience? I know there's, you know, the ups and downs entrepreneurship. And so, you know, you don't necessarily get to bypass, you know, being a business owner and all that comes along with that. But from my standpoint, you eliminate a lot of, you know, proving the market out, proving the concepts, proving, you know, what the price points is for the service or product and kind of get to that, you know, next phase of business, which is buying right and then building from there.

I would agree almost 100% with everything that you just said there. You know, sometimes I'll be being in an investment space, you know, sometimes I'll get people reaching out about startups and whatnot. They'll say, do you want to invest? And I'll think to myself, Man, that sounds like a great idea. And then I say to myself, but Nick, you, you think every single deal you get sounds like a great idea. So I, I don't, I don't trust myself investing in early stage companies, but with these mature companies, that dynamic that you talked about is not only very common, it's exactly what we look for. You know, we, we, we like situations where there's an owner that has, you know, doesn't really care about growing the business. They've been making $800,000, $1 million, $2, $3 million a year and Do they really care about taking their earnings from $2 million to $4 million? Heck no. I mean, what at this point in their lives, what they care about is spending time with the grandkids, playing golf, traveling, or whatever their interests are. And the cool part is whenever we, a lot of times whenever we get in there, we start talking about how we would potentially try to grow, you know, based off the seller's inputs as well. But once, once we start talking about that, oftentimes it really reignites the passion of the business owner in the business. They get excited about somebody else that cares about their business almost or as much as they do. And it's fun for them because they get to participate in a growth scenario. But all the risk is not on them. They're not right. They're not writing a check in order to buy that next piece of equipment or they're not putting their entire family's nest egg on the line in order to pursue a new product line or a new geography or whatever. That would be us. But again, they get to participate that, and like I said, it can reignite their passion.

Yeah, no, that's really cool. Um, talk a little bit— we talked from like the entrepreneur side for people that maybe want to, you know, make that, make that jump, make that leap, and, you know, do this themselves. But Talk a little bit about those that are, you know, from an investor standpoint, you know, what does it look like, you know, when investing in the space? What are the different types of strategies that different groups like yourself and others use to go acquire these businesses? And what does that generally look like in, are there multiples and the capital structure? Kind of lay it out for us here a little.

Sure. Let me, let me talk to you a little bit about our model and I'll use our model to contrast with what some others might, might do.

Great.

So starting at a high level, you know, we're typically going to buy businesses with at least $3 million of EBITDA. Typically we don't look at anything much above $15 million of EBITDA. You know, that's, you know, not exactly how the lower middle market is defined, but generally speaking, we would consider that to be the lower middle market.

And real quick, just for those that don't know what EBITDA is, can you give us a quick rundown?

Yeah, sorry. Earnings before interest, taxes, depreciation, and amortization. Now, if you're a Buffett fan or a Charlie Munger fan, they've talked about EBITDA many times and how much they hate it because it's not a proxy for cash flow. I completely agree with that. However, it still can be useful whenever you're trying to compare businesses in different industries.

Not, right? It's kind of industry standard for how you base the valuation, right? Right.

Yeah, yeah. It's, it's not a proxy for cash flow, but you can use that to see how much, how much cash flow the company is generating independent of capital structure, which is the important part there.

Yep.

So, so we're, we're at the lower middle market, lower end of the middle market. Obviously there are firms that are mid-market, small cap, large cap, et cetera, et cetera. You know, additionally, another classification I would say is industry preference. We are largely industry agnostic. You know, being in Kansas City, we see a lot of manufacturing firms. If you look at our portfolio, it's overweight in manufacturing. Part of that's because my background, I have an industrial engineering degree from the University of Missouri, but also, you know, Ben, you can relate to this. In Kansas City, you can't walk too far without running into a manufacturing company, right? However, you know, through some of my experiences working in manufacturing, I realized what really was my passion was not necessarily making manufacturers more efficient or, or more streamlined. It was thinking about what you can do in order to grow the top line by adding equipment, adding people, adding new capabilities, etc., etc. And that's why we have shifted away from a manufacturing focus to really being industry agnostic, because if you look at so many small businesses, they've done a great job of getting to a certain size and scale where they're, where they're stable, they're healthy, they have potential for growth, but they're not quite to the level of sophistication of larger companies that have a defined sales and marketing strategy. That have sales and marketing staff perhaps on board or, or at least agency relationships. So we really feel like the companies in the lower middle market are the ones that we can help grow the most because there's that sales and marketing component that's missing that we can help fill out. And that leads naturally to the third area that I'll talk about, and that's how we are operationally focused. And operations doesn't just mean, you know, in a company like the shop floor or, or being an employee in the business. It just means that we're not just going to show up to the quarterly board meetings and shake hands and, you know, hope to hear everybody say how great we are. We're going to build relationships with the companies that we acquire, as well as the people that are working for those companies and try to work together to form a stronger team that can help take this business from maybe $20 million of revenue today to 40 or 60 or 80 or who knows what that, that ceiling would be there. So there are a lot of different classifications or differences beside within private equity firms, but those three size, industry, industry preference and operationally focused or more passive are three of the major ones, I would say.

And how is that different from other firms in your space that are maybe doing it different than you guys are doing it? How do you, how do you contrast that with maybe other strategies?

Honestly, a big way that I contrast that is, you know, this might sound critical and maybe it is a little bit critical. So, you know, you can, you can, you know, smack my hand after this. But, you know, what I would say is, you know, at Four Pillars, we are, we're entrepreneurs. We're not spreadsheet jockeys. You know, we are not financial engineers. We are looking at businesses. We are not just looking at a computer screen. We're getting out there, we're shaking hands, we're meeting people, and we're wanting to hear the story because we care about our personal story and we care about the personal stories of the entrepreneurs and the business owners that we work with and whose businesses we ultimately try to acquire. You know, so often I've worked with other private equity firms and the feeling is that they crunched all the numbers in their spreadsheet and, and cell C2000 or $2,567,000 or whatever that cell reference would be was 5% off and they can't do the deal. That's not us at all. You know, if our spreadsheet doesn't put something out, we'll talk to the, we'll talk to the business owner and say, hey, here are our assumptions about this. Are we wrong? Are, you know, how can we mitigate this risk if it's a, risk-oriented thing. How could we potentially, you know, grow a little bit more so that we do meet our growth targets or something along those lines? Again, it's just really a relationship focus and one that is trying to build a collaborative team, not just a team that's trying to put together a pretty presentation.

Yeah, that makes a lot of sense. And, you know, definitely a lot of different perspectives when it comes to it, right? If it's just, you know, this spreadsheet jockeys trying to structure, you said financial engineering, which we can get to that in a little bit, you know, because there are ways that if you change the capital structure, you can potentially, you know, put into a different growth mode. You can potentially increase value with more leverage, et cetera, et cetera. But before we get to that, you know, I'd love to hear, you know, just kind of taking a step back and thinking about, you know, how do you create value, right? And, you know, from my standpoint, we do a lot of real estate, I've talked about this a lot, right? Where every dollar of income that you can bring to the bottom line has a multiplicative effect on value, right? And generally real estate trades at much lower multiples, or I'll say much higher multiples, much lower cap rates than businesses. But it's the same concept, right? In these businesses, like, so for example, I don't know exactly what kind of range of multiples you're seeing, but You know, maybe you're buying it somewhere in a 3 to 5x EBITDA multiple. So if business generates $1 million, maybe you're buying that business for, you know, $3 to $5 million. Maybe my number's a little bit off, you could correct me in a sec. But if you can increase that bottom line to $2 million, all of a sudden you've now doubled the value, right? And to what you're saying a minute ago, to get you know, you're talking about top line growth, but a lot of times if you have the right business model and the right, you know, operational structure, cost structure in place, growing that revenue, you know, once you already have existing clients and existing, you know, revenue and existing products to add to that is not rocket science, right? And if you have a good cost structure in place, you could drop a lot at the bottom line. All of a sudden you're increasing the value pretty substantially, especially if you add a little bit of leverage. To your purchase. So talk a little bit about kind of your perspective on when you're trying to, to add value to these businesses. What's, what's your— what are you looking for on the front end to identify the best candidates for that potential growth? And then what are kind of the standard things you're doing? You mentioned, you know, adding a piece of equipment, adding staff, adding a sales and marketing team. I mean, is it really as simple as that? I talk a little bit about some of the kind of key things you guys are seeing.

Absolutely. So first off, in terms of what we look for going in, the first thing we look for is the mindset of the seller and the mindset of the management team. Have they actually been trying to grow, or is it more along the lines of, well, sure, we, we want to grow, who doesn't want to grow? That's, that's a lot different than, yeah, we want to double this business in 3 years, here's our plan, etc., etc. I mean, I'll be honest with you. I mean, I rarely encounter sellers that, and management teams that have a defined plan to double their business in 3 years. A lot of times if that is their plan, then they're not gonna want to have conversations with folks like me because they're not ready to sell. But in terms of, well, what I should say is, given that that's probably not there, what I would say is first we just start with a conversation. It always starts with a conversation. You know, if the, you know, if we're talking to Joe, the business owner, hey, Joe, what if you were going to grow the business? If you had a little bit larger checkbook that wasn't coming out of your own personal checking account, how would you try to grow the business? We talked to some of the other members of the management team to the extent that we have access to those folks. From there, it's really just thinking about all the different levers and strategies that we've used not only in our portfolio companies, but in earlier parts of our career to grow companies. A common process that we go through with our portfolio companies is a strategic planning process. This is not rocket science. I am, you know, not trying to say that I'm reinventing the wheel here at all. I mean, we do have our own flavor of a strategic, strategic planning process that we use, but, but it's a very— I mean, it's a variation of, of many of those out there. And actually done an in-depth video on strategic planning if that would be of interest to anyone. But that's always the first step because this might sound trite, but oftentimes what we see is that the greatest predictor of whether a company is going to grow is whether or not they actually have growth as a goal. I know you're laughing because that sounds so trite, but again, it's in our experience, it's true. But taking that a step further, What we often see is that you could ask the management team, let's say there's 5 people, they all say they want to grow. Okay, well, what does growth mean? Okay, well, the first guy, we want to grow EBITDA by 10% by the next year. Next guy says, well, we need to add 2 more customers by the end of the year. Third person says, I want to triple revenue within the next 3 weeks. You know, I say that for exaggerative effect. The point here, though, is that even though growth can be a goal, growth looks very different to different people. And for that reason, if nothing else, a strategic plan will help align the objectives, the goals, and also the strategies and tactics used to achieve those goals so that everybody's rowing in the same direction and everybody has an idea of what that goal of growth actually means.

Totally makes sense. Yeah, it's, it's funny because it sounds so dry, but it is in practice. A lot of people aren't doing that, right? It's like, well, what are your goals? And then what are your actual KPIs to make sure you're measuring your progress to those goals, right? There can be a big disconnect not only on what is the goal or on alignment there, but then are we actually doing the right activities to get to those goals, right? I think that's, you know, and I've not been in that space like with you a lot, but I can imagine, you know, whether these are family-owned businesses have been, you know, few generations kind of, you know, working it, or it's an entrepreneur that started a business, they've had some success, but, you know, a lot of what they've done has kind of been relied on their network, their expertise, and they don't have the systems or the processes or the teams or the ability to delegate and create these you know, self-perpetuating machine, so to speak, right? It's kind of more reliant on them. And that's where you could come in and bring a more strategic approach to help create a strategy that can, can, you know, add real numbers to the bottom line.

Yeah, yeah. A topic we talk about a lot is we try to increase the level of sophistication within the business. That doesn't mean at— that doesn't mean we think the people that work there aren't smart and we need new people that are quote unquote smart or whatever. Not it at all. It's just, you know, talking, rephrasing or rewording what you mentioned earlier, a little bit earlier, is, you know, sometimes we'll talk to a business owner and they'll say, well, how do you handle this? Well, you know, Sam always handles that. Well, what do you do when Sam's gone? Well, the week before Sam goes out of town, he's always really busy trying to get everything he can done as much as so And then while he's gone, you know, these other two people can do part of his job. But man, the week before Sam leaves and the week after he gets back, he is, you know, he's not a happy camper because he is working his tail off. You know, now adding processes and procedures, it does add a level, a level of bureaucracy. I will admit that. But also it helps prevent that situation where when one employee is gone, the productivity or effectiveness of your organization suffers as a whole. As you try to increase the value of your business, that level of sophistication has to increase. Otherwise, you're not going to get more money for your business. You know, earlier you talked about, you know, if there's a company making $1 million in EBITDA, it sells for 3 times, it'd be worth $3 million. If they, if they grew to $2 million of EBITDA, it would be worth, you know, double that. Well, that's sometimes true, but it's actually not always true because another factor at play here is Oftentimes, if your EBITDA increases over certain thresholds, the multiple will actually increase. For that multiple to increase, or for you to make a case to support an increase in that multiple, that's where the level of sophistication comes in. That's where numerous other factors come in as well. But let's just say a little bit different numbers. If you were at maybe, I don't know, if you were at 1.8 million of EBITDA and you were to grow to 3.2, I would say that there's a potential for the value of your business to increase by at least a 1x, maybe as much as a 2x. So it's not just the, the, the delta in EBITDA, it's, it's that, that multiple arbitrage, if you will, that allows that value to increase even further.

Interesting. Yeah, no, that, that makes a lot of sense. So talk a little bit about how you guys approach an acquisition and a business deal.

Are you—

there's different, you know, thoughts on this, but are you coming in as minority owners? Are you coming in as majority and taking over primary decision-making? What's your view on hold period? Are you looking to kind of buy to improve, then sell? Are you looking to hold for a long period of time? How are you forming the capital? Just talk a little bit about, you know, give us an example deal of how it's structured and what it looks like and what that kind of hold period is.

Yeah, I'll, I'll give you 3 examples of deals because they're all a little bit different. The first deal, Southwest Steel Fabrication in Bonner Springs, Kansas, which is a suburb of the Kansas City metro area. My partner and I actually bought that business using an SBA loan. We still own that business. It's doing well. That's, that's the only business that my partner and I own 100% of, and I would expect us to hold that for, for quite a long time. The second business we purchased was with, uh, 3 different capital groups that are called SBICs, or Small Business Investment Companies. It's actually another program of the Small Business Administration, which the purpose is to invest in small businesses like this. The, the 3 groups are KBCI out of Kansas City, Midstates Capital out of Kansas City, and then a little bit larger one out of St. Louis called Capital for Business. We closed that deal in 2017. My partner has been running that ever since. And if you would've asked me at the beginning how long we would've hold— held that one, I would've said at least probably 5 to 8 years. Probably no more than 12. I mean, we're sitting at 7 now. So I think realistically it's probably another 4 to 6 years, maybe more, maybe, maybe a little bit less. But that's our perspective there.

And what kind of drives that decision? Is that the capital behind it that's, you know, making that— help out making that call? Or how do you approach that decision?

Yes. I mean, it's the capital behind that as well as the board. My partner and I hold 2 seats of a 5-person board. We're, generally speaking, pretty patient investors. We know how hard it is to find a good business, to get that business acquired. For that reason, we're not gonna be in any big hurry to sell a business. You know, we want to sell a business when it makes sense to sell that business because we feel like we've done everything we can to grow it. We feel like in order to take that next step of growth, we need a capital partner that has a, a checkbook with another set of zeros, if you will. Sure. So for those reasons and more, we tend to be patient investors.

Okay. And then what was your third one?

Yeah, the third one is really, I would say, a more traditional private equity deal. We purchased that in the first one in 2020 with a bolt-on in 2022. Originally, I would've thought it would've been a 3 to 5-year hold period. It might stretch out to maybe 6 or 7 years. And the reason why I would say that is in 2022, I said we made, made a bolt-on transaction. However, this was a somewhat rare occurrence where the bolt-on was actually larger than the platform. So for that reason, we want to, to give the companies a little bit more time of operating, operating cohesively before we try and transact out of there.

Got it. Got it. Very cool. So it's like you said, it's kind of varied depending on the deal and the capital sources. And are you generally purchasing these with any type of debt? I know you mentioned the first one you did, but the other one's been all equity. What's kind of your capital structure and how do you view capital structure and acquisition? Like what's your take on that?

Yeah, we're almost always going to put some amount of debt on the business. There are some private equity firms that will purchase the business 100% with equity and then very short period after the close, work out a relationship with a senior lender to put some debt on the balance sheet. But generally speaking, whether it's day one, whether it's at close or shortly after close, yes, there is going to be some level of leverage on the business. You know, we would— we like to employ what we would call a healthy level of leverage. That obviously depends on the dynamics of the business, whether it's a high CapEx business, whether it's any level of cyclicality, et cetera, et cetera. Generally speaking though, we're, we're not gonna put, we'd probably put at least 1.5 turns. So 1.5 times EBITDA in terms of, of leverage. Typically you're not gonna go above 3 unless it's a unique situation.

Got it. Got it. Makes sense. And then on the hold period, the exit, are you generally looking to sell to another private equity group, kind of a strategic buyer, or is it kind of different for every business?

It's different for every business. What I would tell you is that the— well, having worked for a strategic acquirer, I know that the valuation process is totally different than a valuation private process for a financial buyer. And if they're— if you as the seller are able to make a case for a very synergistic relationship or a very, very synergistic transaction, then the multiples can be far higher from a strategic buyer than they would be from a financial buyer. What I would say is our goal is always to create a company that is attractive to a wide variety of different buyers so as to maximize our outcome and give us the options that we would like. However, what I would say is we default to assuming that it will transition to a larger private equity firm just because we feel like if we can create a business that is going to pass all the various diligence questions, the various diligence streams that a private equity firm would require, then we definitely feel confident we can pass the diligence process for a strategic acquirer.

Yeah, that makes sense. Makes sense. Well, I'd like to shift the, the conversation just a little bit here in the kind of last part, um, to, uh, the business owner who is maybe looking to sell to private equity, right? So maybe you're listening to this podcast and, hey, I've been doing this for a while and Hey, you know, I actually might be more in the boat of looking to exit and sell my business and, you know, I've had a great run, but, you know, ready for the next thing or ready to kind of hand it off. So what does that look like? Right? Because there, there's certain things that a seller will want to be thinking about and likely far in advance of a sale to kind of get ready to sell, really to maximize value for, you know, a sale. To attract the right type of a buyer. So talk from your perspective as someone who is an active buyer and has sold companies as well. You know, what, what are some of the keys and the kind of golden nuggets that are important for someone to think about?

Well, it's a very good question and a question that could require another 30 minutes of talk time. So I'll try to be concise here. But really, while you were talking, two main concepts came to mind. The first is that private equity is not all the same. There, even though you could, you could read on a firm's website that they invest in this size company, this industry, this is how we like to work together, etc., etc. At the end of the day, just like any other company, a private equity firm is made up of people. And because of that, you're going to have a vastly different feel, most likely from one firm to another. For that reason, I would always encourage sellers to, to get to know various private equity firms, get to know the people there so that they can start to have an appreciation for what some of those differences might be, to start getting a feel for maybe whether or not they, they could potentially work with that person at that private equity firm. The second, the second concept I will tell you, and it's, it's very relevant for, I think, the sellers that might be listening to this or the business owners that might sell at some point is we talk to a lot of business owners that make a lot of great decisions. They have grown their business, they've taken the right risk, they've pursued the right customers or whatever. But the decision that they screw up is what sell-side advisor to use. Now, I'm not saying— I'm not going to say that it's a mistake to use a sell-side advisor. I'm not going to say you're better off doing it or you're better off not doing it. It's got to be the the business owner's decision. I will tell you that you can definitely have a very successful outcome if you don't use a sell-side advisor. You can definitely have a very successful outcome if you do use a sell-side advisor. The downside though is that you can have a bad outcome using either of those, either of those as well. And I can't speak as much to the situations where you're, you're not using a sell-side advisor because, you know, I'm not, you know, I haven't been in those deals. I mean, however, in terms of using a sell-side advisor, I've been on calls with lenders or some of our capital sources and they're just asking me, they say, you know, Nick, like this guy, like his business is amazing. Why did he hire that guy or this firm? And I just have to say, I don't know, because it's, been in these situations where they're hurting the deal, they're causing the deal to potentially fall apart. And we— and it's really, it's really sad almost because all the, all the great that the business owner has done is potentially going to be unraveled by, by the choice of not necessarily using a sell-side advisor or not, but which sell-side advisor to use.

Wow, that's really interesting. Yeah. What would you say are the key qualities, you know, from your standpoint on the other side of the transaction, but having a lot of interaction, obviously, what would you say? Because that is a big decision, right? You spent all this time, maybe decades building this business, optimizing, trying to get ready to go and sell, and then you go sell and maybe your multiple is half of what it could have been. And the time when you capture the most value that you've created over the past several decades is impacted by a poor decision on who you have represent you. Potentially can leave millions or tens of millions on the table, right? So what's, I mean, that's a big decision. How should someone approach that?

Well, first off, what I would tell you is I know no one wants to spend 30 minutes on this, so I will plug an ebook that I wrote that really talks about how to make your business more attractive to private equity, you know, from the buyer's perspective, which perhaps might be a little bit different than how other people would approach it. And that's available at my website, fourpillarsinvestors.com/book. But what I would say is the one piece of advice here is, I guess, don't fall for typical sales practices. What I mean by that is oftentimes how a sell-side banker will win the deal is they will do two things. One, they will, they will tell the seller a higher valuation than perhaps the other people that are vying for the business. And two, they will at least act as if they are more confident about achieving that valuation than others. So essentially what they're going to say is, I can get you more money than anybody else. And then the seller says, well, how confident are you? 100% confident. All right, sign me up. You know, because who doesn't want a higher number with higher certainty? Everybody does. But nobody, nobody can really guarantee that. So You know, what's, what's the, what's the actionable advice to, to try and avoid that? You look for, look for a sell-side advisor that has actually done some research as, as it relates to businesses in your industries, that has performed transactions. Figure out what the, what their typical customer actually transacts for, as opposed to just writing down a number on a piece of paper and it looking really good in terms of what, what that, what that, what that results in. You know, we, we have worked with investment banks in the past and we have seen their, their work product, and sometimes it's a very comprehensive view of what valuation is, but also it's a realistic view because it's based off of comparable transactions. It's based off of— it's, it's using data from transaction services that actually get this data and know, and they're, it's self-reporting what, what those actual multiples are and whatnot. So definitely a situation where it's easier said than done and no, no easy answers. But again, my primary recommendation would look, look for an advisor that is taking a research-driven approach to how they would think about what your business would be worth and who they think would be the most logical buyers.

Yeah, that makes a lot of sense. Well, Nick, this has been really, really interesting. Thanks for coming on the show and sharing a lot of your insights. And I think that last nugget is super valuable. So we'll definitely link to the book in the show notes here and just tell people the best way to get ahold of you or your website so people can go check it out if they want to learn more.

That'd be great. I appreciate it.

All right. Thanks so much.

Thank you.

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