Building A Private Equity Empire: How To Acquire Businesses and Invest Like Warren Buffett w/ Tony Ludlow #TheOnePercent

An entrepreneur is someone who's more risk tolerant than average, very optimistic, doesn't lose a lot of momentum in between failures, and that's really the skill. It's not. It's not that they don't fail. Sometimes I fail a lot. They just don't lose momentum. But what happens is they can pitch, hit and run.

It takes one free person to create change. This is the show for them. We are the creators of the Free world. This is capitalism.com and we are the 1%. In 2016, my business partner and I decided it was time to start listening to offers on the open market for one of our businesses. And so we started preparing our business for sale. And in 2017, we closed on the exit of that business in what was the biggest financial win of my life. I still continue to own a small minority stake in that company. And today I am on the podcast with one of the individuals who was on the team that bought that company. Now, we are not here to talk about that deal, that we are not here to analyze the positives or negatives.

Or to recap the experience.

We're here to talk about private equity as a business. Because as I went through this process, I became fascinated with the business model of acquiring other businesses, specifically using other people's money to buy businesses. Some of my entrepreneurial buddies who also had exits, we kind of got together and we were talking about the model of man starting a business is really hard. But look at all these businesses that could be acquired with other people's money and then grown with our talents and our expertise and our energy and our network. Doesn't it make more sense to buy businesses and then to invest in them, grow them, and sell them again? Could we make the same amount of money in the same amount of time with less effort, and do it maybe at scale under a system? Now, I still explore that as a potential business model. But in this episode, we're gonna dive deep into what that business model looks like from the individual who was on the team that acquired my business. His name is Tony Ludlow. He is an entrepreneur who now serves as an advisor and an investor. And so he understands the background of entrepreneurs. He understands what makes them tick. He understands what it takes to build a company. So he has a unique spin on his ability to work with, advise, and mentor entrepreneurs, both informally and also as someone who is going to be working with them when he acquires their business. In this episode, we talk about the overview of the private equity model. We talk about how the money is raised to buy a business talk about the types of companies that he looks for, how he fixes them up, if you will, how he increases their value, how he prepares them for sale, and what the overall pitfalls might be if you are running a company or if you are investing in a company. So this is an extremely valuable episode. If you are making a pivot in your career or you are looking to model some of the wealthiest people in the world, this is the model that created a lot of the richest people in the world. So you are going to enjoy this chat with Tony Ludlow.

Tony, thanks so much for hanging out with us.

You're welcome. Glad to be here. Good to talk to you again.

Yeah. Tony, some people know the story that you were part of the acquiring team of a company that I exited in 2017. And that made me really fascinated by your business model as a private equity group. And there's kind of a buzzword, a buzz phrase in among entrepreneurs and business owners at this point because the economy has been so good, because interest rates have been so low, because there's a lot of maturation in the entrepreneurship space at this point. And I've never had anybody come on and talk about the nuts and bolts behind private equity. So my first question is going to be about your thesis as a company, as a. And if you have a consistent model that you approach when you are buying companies. But I want to dial back a little bit because I know you started as an entrepreneur who was building your own company before you went and started buying your own company. So would you tell us a little bit about that?

Yeah. So I think even going back a little bit further, my background's a bit eclectic. And you'll find that a lot of private equity guys have very dissimilar backgrounds. They come to it a lot of different ways. Mine, I was in manufacturing, accounting many years ago. I was at Dallas Semiconductor early on in the chip days, I was an accountant there in the manufacturing area. Failed engineer, really. Always thought I wanted to be an engineer, but ended up in accounting, but was near the engineers. I was there for seven years, learned about business. I was a young guy, left there, went to a law firm, worked in a law firm for a while and did M and A work where I did acquisitions for other guys and where I was more the scrivener of the transaction versus the quarterback. After the law firm, I went to ACS, which is Affiliated Computer Service. It was a Fortune 500 company that did about 20 acquisitions. And I was on the team there. And after all of that eclectic work of being in operations and that also being the scrivener. The attorney decided to have a go at it with a friend of mine who was at a private equity firm that mostly focused on health care at the time. So I went in with him as a partner and we started looking at deals and did that for a while. Learned a lot about health care. I didn't really know a lot about health care at the time, but I always had an itch to do more technologically leaning companies and more Internet, which they didn't have. So I broke out and started my own private equity firm with my partner about nine years ago. And you know, like a typical entrepreneur, just through kind of caution to the wind, convince my family that I knew what I was doing when I didn't and made a go for it. So I mean, I don't know if that's covered what you were looking for, but that's a bit of a indirect path to where I ended up today. It was never planned. It's just always looking for the next thing.

I think private equity is sometimes a catch all term for a lot of different business models. But if I were to summarize it, I would call it someone who uses a combination of other people's money to acquire businesses, scale them, and then either keep that business or repackage it for a sale. Would you describe it any differently or am I fairly close?

You're close. And I often find myself having to explain what I do to people who have no idea. And the easiest thing that you can break it down to is if you buy an asset and you grow it and you sell the asset, it's no different than a lot of people understand house flipping. So if I buy a house, I improve the house, make it prettier, make it better, and then I sell the house at a profit. It's very similar with the companies and in financing it was actually the structure is very similar in that regard to it just unfortunately or fortunately for business, it usually takes anywhere from three to five years to grow the company as opposed to a couple of months rehab on a house.

Now I know everyone has their own kind of approach or their own, what they call thesis, their own way of looking at businesses, attracting deals, adding some value to it and then selling it based on their skill set and their background. Do you as a private equity investor, as a private equity entrepreneur, do you have a general thesis or are you just looking at each deal individually?

It's a little bit of both. I think a lot of private equity firms out there will Indicate that they're generalist. And that's mostly because they want to see a lot of deals. Seeing a lot of deal flow is important, but really, at the end of the day, what I focus on is companies that I understand and that I can help them grow. I usually don't make any money or make any meaningful money unless the company grows. So you have to know a little bit about the industry. You have to know about the company. Sometimes that's complicated, sometimes that's simple. A lot of smaller companies need help with regard to just the basic blocking and tackling because being a small company is just hard. Sometimes they don't have the accounting help they need. They don't have the marketing help they need, and those items are more simple. But sometimes you need to know the business more and to drive it better. So I try to steer clear of businesses that I don't understand because if I got in there, I don't know if I could help them grow and if they don't grow, I don't do well.

And do you have a sweet spot in terms of the businesses that you know you can add value to?

Yeah. So it's always a push and pull between being creative in understanding a business and knowing if you can really help versus if there's ego thinking, oh, I can get in there. That can't be that hard. I can tell you this, all businesses are hard.

Whether you know them well or you don't. They're all difficult. They're very human endeavors. Everything looks good on paper, but you need people to get all the work done and people you have to motivate people. You have to build a cult like mentality. Everybody's pulling on the same rope and get alignment of interest. That takes a psychological angle. I do try to stick to things that I think I can understand and I have an alignment with the management team. It's important that we're going to be working together for a long time. And so we need to approach things somewhat similarly because it's tough to get out of those agreements. Harder than marriage?

Yeah. I remember in our first conversation, I think you said that it's just like marriage but without the makeup sex and it's harder or something like that.

It's harder to get out of a contract when you're in a private equity contract than a marriage and there's usually no sex.

So, Tony, when you are approaching a deal, I know that each deal is financed a little bit differently, but for the most part, how are you financing the acquisitions that you're Buying.

Well, I'll give you a typical structure of ours and I'd say most of the deals we do center within one standard deviation around the very generic structure I'm about to lay out. But what we will do is if we buy a company and I'll pick a multiple of four because the math is easier. But say if you're going to buy a company for four times its ebitda, in almost all cases our owners or the sellers will keep a 25% retained stakeholder, will be purchasing 75% of the business. And how we fund that the cash at close of the 75% of the value of the business is usually one to two turns of equity from my equity investors and my own money. And the difference would be in debt, not that different than if you were going to buy a house. You'll need a down payment. That's what the equity piece is. And then the balance is debt. The ratios are a little bit different. I think when you buy a home, it's 20% down payment, 80% debt. Private equity deals can fluctuate depending on the amount of risk the deal has. You might want less debt on it, or if it's a pretty safe deal, you might go the other direction. But that's how I most structures fall into that category. The only thing that fluctuates is the purchase multiple. We paid more than 4 before as well and that changes the ratios.

So just so I understand it, you are raising the down payment from a list of private investors and or your own money and then you're financing the rest with some sort of a traditional financing relationship.

Yeah, semi traditional. There is a very well developed group of lenders out there that only lend to people who buy businesses. You have senior lenders and you have a lot of mezz lenders that only lend to other businesses and they'll lend directly to companies. But they actually prefer to have a private equity group in there managing the company because they also have the additional protection of the private equity group having investors that'll throw money at the company if it's in trouble. And they usually feel that they're better managed if you have the original management team plus a private equity overseer as well. Now, whether that's true or not is different for every deal. But the banks certainly view it that way. They like the comfort of having a private equity sponsor when they lend to a company.

So is overall the thesis to use leverage to acquire good assets and to let the profitability of that business pay for the debt with you using your Knowledge and expertise to bring growth into the company with the expectation that the growth is going to pay down the debt. To pay for the growth and for you to have a more meaningful exit at a later date. Is that kind of the general thesis?

Yeah. So there's a little bit of sandbagging. You get the advantage of both methodologies. So number one, if the company stays flat for five years, and that's a typical hold period, when you do a private equity deal and you buy a company, everything's geared for that. Your lending is five years. Your investors usually don't ask a lot of questions till about five years. It's just kind of shaped that way. And it so turns out that in five years, depending on your level of debt, if you keep it conservative like we try to do, you can pay that debt off. If the company doesn't grow, it stays flat in about four and a half years. So usually at the end of the fifth year, there's no debt on the company in theory, whether it's grown or not. So that's number one. And number two, there's usually growth as well. So you get a double leveraging or I won't use leveraging, but you get a two avenues of growth.

Now, what could possibly go wrong, Tony?

Yeah, everything.

A lot can go wrong. It's like driving a car down the highway. That has a lot of play in the steering wheel, right? And when you get in the car, it's going 50 miles an hour and we say we want growth. So we step on the gas and try and take it to 100. And all the slack that's in the steering is even more pronounced. And so you got to change the tires usually while the car's moving you have to do oil changes and things. But honestly I'd like to say that there's very few businesses that I participated in where I came to the management team and said, I know a bunch of stuff you don't know. I mean, I'm pretty good at doing basic blocking and tackling and measuring and accounting and follow up and management type stuff. But a lot of times the management teams I meet have just as good ideas as I do. But what we try to do is be a force multiplier. And wherever an entrepreneur was going to get in 10 years, we try and help them get there in three years if we can with our additional cash, arms and legs connections and a few of our own good ideas as well.

And what are you usually doing when you acquire a company in order to add value? I know with our deal that we did together. The first thing that we did was we looked at infrastructure and people. So I imagine each approach is going to be a little bit different. But do you have a checklist that you're usually going in in order to improve the value of a company?

Yes. I wouldn't say it's as official as a checklist, but there's just really things that you have to do. You don't really have a choice. Number one is you need to know what the vision is of the business. And I usually start with what the owners think the company could be in five years. And then I usually ask them, whatever that vision is, what if it was doubled? And do a mental exercise and say, if you woke up tomorrow and the business had doubled in size overnight, what would break first? And I try and build it backwards, you know, so build it with the end in mind. And so very first thing they say is, oh, we couldn't handle all the orders. Okay, well let's, let's establish that chain. Or we couldn't take all the calls immediately or we couldn't process the invoices. And so let's start hiring that out. And so we go ahead and build it kind of like Field of Dreams and anticipate growth. And that's exactly opposite what an entrepreneur does. An entrepreneur will grow a business only by the amount of cash that they have in their checkbook. So they'll say, look, I know I want to grow, but they check their checkbook. And so they end up being self limiting little bit. Which is just so you know, the only way you can start a company, it's the right way to do it. But at some point when you have a little air cover and protection, let's just assume we're going to be successful and double in size and start building it right now. And a lot of things fall into place that way. It's a mental exercise. It kind of frees everybody up and gets them to stop. The very first thing they say is, well, I'd want to hire a bunch of salespeople, but I can't afford it. I said, well, that's not what I asked you. If you doubled in size. They go, well, I'd need five more salespeople. I go, all right, we need to start hiring salespeople. Knowing that it takes, it would take almost six months to hire five really good salespeople. You got to start now.

So a lot of times, at least for me and some of the people that I've had this conversation with, the hesitation around something like this is the leverage piece, because debt sounds scary because you have, if you buy a company for $5 million with a $4 million leverage, that means you got $4 million hanging over your head. How do you deal with risk? And have you ever had something go terribly wrong on that?

There is risk when you have debt, but there's also.

Everybody understands the value that you have in the company is usually not. Say if you have a debt number of, I don't know, pick number five, $10 million worth of debt. So if you have 10 million in debt, there is almost never $10 million worth of assets sitting around that the bank's going to run in and grab all your computers and sell them and get their money back. So they know that going in. And so the only value in the company is its success, either by you operating successfully on a month to month basis, making your payments as they come up, which usually are very reasonable, or getting along to the end where you have a second exit. And when you exit the company, if the value is the same, of course they'll get their money back and a new bank will come in. So believe it or not, there is a lot of synergies to a bank, to you being successful because they don't get their money back if the company isn't successful. It's not as if the company does bad and they take the cash. If they wanted to run in and take the cash, they probably get three months worth of payments and lose their $10 million. So they usually are very understanding. I've met very few groups now. Sometimes they start asking a lot of questions. They start questioning your ability to. So you know, you take some ego hits, which is deserved. If the company is underperforming and things are starting to get tight, they have a right to ask the same questions I ask of the management team. Hey, what's going on? Because believe it or not, everybody has a boss and you never get high enough in a chain where nobody has a boss or there's only one guy and none of us are perfect enough to take that role.

And that's usually what happens. So it might be scary to have a bank with you, But I'd say 80% of all the bank partners I've operated with have been good partners and they get their money back and they do.

Well, based on your previous comment, I'm not quite sure if you are referencing God or Jeff Bezos and some might argue six of one, half a dozen of the other, but I have a question for you that I'm a Little nervous to ask this one just because I don't know how to ask it delicately. Is your thesis, in the event of a failure, do you intend on personally making it right or do you allow the bank to foreclose? Is part of the risk profile on you or does the bank hold the ultimate risk in the event of a business failing?

I can speak from. And I always break things into two groups. You have legal pathways, so you have legal control and you have functional control legally. I can speak from the loan documents, the private equity firm and the private, you know, all the people that I have here, I have eight people total that work here, another partner. You know, we're not all personally liable for the company or the debts. The company is responsible for its own debts. So that's one question that you're asking me as far as making it right, but functionally, do we fight for it? Yeah, we have reputations. Importantly, you know, word spreads around that if you have difficulty, and some companies have difficulty, but if you don't fight for it, banks will spread the word and you'll have difficulty getting loans for future deals. But more importantly, or just as importantly, you have your investors. There are people that gave money to you to help invest in the deal, and they expect to get that bet and they trust it in you. So I take that burden of our investors money along with our bank's money. I consider them all investors. And here's why. I don't get a penny until the bank and my investors get all their money back. I get what's left over. So as far as I'm concerned, they're all investors. So I fight hard for them. And there are times where companies go flat or go negative. And we'll come in and say, there's been a case where we have a manufacturing company, got a lot of big orders, went and started the management team, bought a lot of materials to go after all those orders because it grew about 40% and they used up all the cash. And so I went to the bank and I said, hey, we're going to skip your payment this month because we need it for working capital. And I go, but in lieu of that, I'm not going to take a management fee, which is not that large to start with, but just to let them know that if they're not going to get paid, I'm not going to get paid. And they're usually appreciative. They understand and they're grateful. These are good problems to have. And so you've got to be aligned. I mean, at the end of the day, things can get sideways. Banks do have our concern set overlaps with the bank about 85%, but there is that 15% pie slice where we could diverge. Doesn't happen very often.

So it sounds like a very different banking relationship than how most less professional investors see debt. Because it sounds like it's more of a collaboration than it is a lean holder beating you over the head.

Yeah, I don't want to make it sound like there's a lot of sleepovers, but it's a little bit of your older brother who gives you a hard time, but wouldn't tell anybody that he still likes you though. So, you know, there's a healthy amount of respect. And at the end of the day, you can't get away from the math. And that is if the company doesn't do well, nobody does well. And the company has to be successful. Banks don't want to run companies. They don't have people to run companies. They need us to run the companies. And there's no value for their $10 million unless we can get the EBITDA continuing to flow or to have there to be enough enterprise value for the next set of buyers to pay them off.

So, Tony, I can see many scenarios in which this model makes a lot of sense and where there would be a lot of really amazing wins. I mean, this model is how some of the wealthiest people in the world have built their wealth. We're buying companies here, so that all sounds great. But I'm curious on the other side of things, there's a lot of people kind of interested in this model. Money is still cheap. The economy is really good. Question number one, have you had any really big failures or things not go how you wanted? Number two, do you see any potential downsides of so many people entering the marketplace while the economy has been good for so long? Do things change when and if the economy changes?

Yeah, so that's kind of a two part question. And yes, it does change. I mean, you've hit on a really good topic. So as far as money being available and a lot of people rushing in at the end of the day, the structure of the deal, the price of the deal, all of that matters a little bit. If you can focus on one thing as having a successful company grow, it fixes everything and you want to have a company be successful. The economy going down, however, only affects your company directly if it's affected by the economy. If, however, the economy is down and your company's still doing good, it'll be fine. The only issue that you have is when the economy is down, it's harder to get deals done. Like if you're in this world and you need to do a deal a year for whatever reason, if that's your goal. If the economy goes down, it's harder to do deals because banks get a little bit more conservative because they view every company that exists is not going to. Their historical performance is automatically discounted because that's when a good time. But now that we're in a bad time, we haven't been in a bad time long enough to prove that all these financials are going to take a nosedive. So they want to wait and watch to see if the knife starts falling. They hesitate. And then we also have investors. And I've had this before. Hypothetically, if you have an investor that has $600 million and the economy drops and their net worth goes to $400 million immediately, they don't feel like doing private equity because you're asking them to invest in companies in an area in these alternative assets that do have higher risk profiles. Right after they just lost $200 million. Now you and I might say, well, they still have $400 million. That's just not how everybody thinks. It's all relative to where they were at. And so they tighten up as well. And so your sources of capital get tighter, but you can still find really good deals to get done. And there are a lot of winners in a flat or down economy that are doing great, like Kramer, which I watch sometimes. Regardless, there's a bull market somewhere. You have to work harder to find it.

Do you have companies that you follow that you model that kind of inspire how you invest or the types of deals that you seek? Obviously there's the kind of famous private equity groups like KKR or 3G Capital. Are there any companies that you as a company model or aspire to be a little bit.

I mean there are some early pioneers in the lower mid market where we play. It's difficult not to want to become a kkr. But there's a fundamental shift because KKR or Blackstone or these big groups have a lot of money to put out. And just say they have a billion multi billion dollar funds, they acquire that money and they're required to put it to work sometimes in seven years, sometimes shorter. So they have a lot of pressure to get money out working. And since they have to get all that money out in a short period of time, they cannot do a bunch of little deals. So they end up chasing larger deals and Those larger deals have lower returns. It's harder to grow a billion dollar company to a $2 billion company than it is for me to take a $2 million EBITDA company and make it a $4 million EBITDA company so I can double EBITDAs and companies almost all day long. Those guys can never do that. You get a better return at companies my size. And it's difficult as you get larger and you get more successful not to go upstream. Everybody pushes hard and they start going upstream more and upstream more. And there's been a couple of groups that say no matter how big we get, we will not chase bigger deals. One of them might be the Riverside Group. I think they're kind of the penultimate lower mid market, really big firm that stays lower mid market and there's more work in those smaller companies, but if you stay because you have to do more of them, but their returns are higher. And that's where my thinking is, I think staying at this level and helping entrepreneurs transform from entrepreneurially led companies to professionally managed companies, getting them ready for the kkrs. I'd love to sell mine to kkr. Some of those guys wouldn't want to deal with the lack of maturity in the different departments in some of the companies I have. And that's what I'm here to do. I like bringing order to chaos, whereas a KKR wants to bring more order to order.

When you say that you would love to sell to a group like kkr, do you mean the equity group or what are the individual businesses or some combination of the two?

The equity group, I like to take entrepreneurially run businesses and we're the first private equity group where we get in there. And a lot of our guys don't have monthly financials, they don't have a CFO, they don't have marketing guys, they don't have KPIs, they don't have metrics. We put all that in place, build out the management team if necessary, give them some goals, some achievements. And then when you go to a kkr, very first, a lot of times they have. Their due diligence is extreme. So right off the bat they say, I want to look at your revenue sliced 50 different ways. I want to see it by geography, I want to see it by gender, I want to see it by income. And they just slice. Well, we can do that. We know that that's coming, whereas that's not even possible when we buy a company. So we're getting them ready for the big time.

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Do you have a deal size that you stay in the range of? You mentioned mid market. What are the numbers and the financials usually look like when you're approaching a deal?

The lower mid market is an undefined term but it usually the lowest amount is about 2 million in EBITDA and 10 million in revenue. So it's 10 and 2 is kind of the floor. And that's an artificial floor because I know a lot of guys that would go lower than that. But just banks and investors just have no appetite for that. So if I have 400 banks that like a 10 and 2 company, I probably have about 20 banks that like it below. I mean it falls off pretty fast. So the floor is about 10 and 2 and lower. Mid market goes up to about 10 million in EBITDA. Some might even say 8 million in EBITDA. So 2 million to 10 million in EBITDA is kind of where we try and stay.

Your ultimate goal then is to have growth in three to five years and then exit. Hui is usually purchasing companies after they've gone through your processes.

Everybody usually wants to sell to a strategic. Right. Somebody who's already in your industry because they pay more for two reasons. Number one, they don't require a retained stake, they're going to buy 100% of the company. And number two, since they plan on getting rid of the duplicative departments like they don't need two accounting departments, they don't need other duplications, they don't need your software, they don't need all that stuff. So those are all add backs. And so where a. A strategic buyer might pay eight times, a financial buyer might pay six. So you get a two times multiple. Sometimes they're selling to a strategic because they're going to fire some people and they're going to pay for 100% of the company. The problem is at any one time when you go out to a market, truthfully, there is 300 private equity firms that are interested in your company and about five strategics. So the ratio was just off. And number two, strategics move really slow. They have a board of directors they have to run it through. They just don't appreciate our timelines. And so you get into some speed issues. So while I prefer strategics and I have sold to a strategic before, it took eight months, which is a long time by the way. Private equity guys are quicker, they know the flow and so you almost always go to private equity. Another larger private equity firm.

I want to now switch the, the approach where are usually sourcing most of your deals and how many do you look at before you pull the trigger on one.

Yeah, so that's a bit of a world that you have to develop. There are places that you can go to for some of the deals that. Well, let me back up. There's a broker world. Just like in homes, we have real estate agents. You also have for businesses you have brokers and then you have investment bankers. Brokers are usually only dealing with companies and selling them usually at a smaller size. Investment bankers will do much larger companies, they'll do public companies and they'll also help with financing too. They're much more sophisticated. So it's the difference between Main street and Wall Street. But there's an entire group of these guys that do transactions. And so they get a company signed up and we reach out to these guys and either through mailing lists that we've signed up to or relationships that we have, or we call them, they send us the deals, we call for deals. We have a database of about 3500 brokers, investment bankers that are in this industry that may be Doing deals. So we do email blast and we have a database and try and keep in contact with them. That usually generates about 65 to 80 new companies a week that we get either directly sent to us or just junk sent in our collection inbox for new companies to review. We do a first pass filter on that. And about half of those don't make it past that first pass filter to even get entered into our Salesforce, our CRM tool, which we switched over to deal cloud. Actually, in the first pass filter, the ones that are getting knocked out are like the pizzerias and car washes and seven elevens. Those don't make it, but those are in there. And then we meet every Monday to go over the new deals that have come in. And at that point, I'd say another 2/3 of them don't make it past the teaser stage, where you just have a teaser, one page that explains it. The ones that do make it on, we sign an NDA and get the broker book because usually the broker, the banker has a book that they put together. We read that if we still like it, we'll have a broker call. If we still like the company and the broker still likes us. After the broker call, we'll have a manual, we'll have a management call. And then after the management call, we'll usually compete for Lois. Usually try to come in second place if we can.

In terms of your offering.

Yeah. And our offering. Yeah, usually when I come in second place. That way when we go and adjust our price up to match it to the top guy, we know we paid the correct price, we haven't overpaid. But more importantly, we usually get chosen. All things being equal, the more operating background you have, because since the management team is going to stay on, they usually want to know that you understand what it's like to run a business and that you're hard on issues and maybe soft on people. Where sometimes you have financial buyers that don't have a lot of operational background and they're a little bit more spreadsheet focused and KPI focused and I think you got to be both. And so if I'm competing against somebody who has less operational background, we usually will win 70% of those.

Tony, that makes sense. In where you are acquiring deals, where are you acquiring talent? You mentioned that that is something that you focus on when you're starting to build up the vision of the company. Even as an entrepreneur, I have a hard time finding really good and keeping really good talent. So as an equity group, that's one step removed from the business. I can't imagine it's any easier. How are you going out and getting and keeping talent that's going to run and build a company?

It's hard. It's part of the art form. But it depends on which layer. Usually if you want to break the management team down into the chief executive officer, then you have an operating officer who's a little more internally focused and then you have the cfo. The very first thing we do usually before we get the company day one, is have a CFO that we plug in. Getting a good CFO is a bit easier to do than anyone else, only because the base level of skills that a financial guy has is somewhat homogenous. They're all CPAs, they all understand accounting, so at least 45% of their skill set is locked in and you know what you're getting. Then you have to make sure they have some background in the industry and so that one you can do a search for. We have relationships around town. We can sometimes talk to other groups that have some guys floating around from another private equity firm. Beyond that though, it gets a little bit more artful. If you want to add a chief operating officer, that can be tricky because it's very company specific and we almost never change out the CEO. Usually the management team stays there, but we want to put support around him to make him better at what he does. Instead of doing 10 things okay, we want them to focus on doing like five things really well.

Can you explain why a CFO is your first move and why that's valuable to have on a team?

Yeah. So I think information is the lifeblood of all decisions. And what I find is that a lot of these companies don't have a well developed set of measurements. And what they have is entrepreneurial wisdom and gut feeling, which, side note, is amazingly good for entrepreneurs. Any company that gets to be 2 million in EBITDA doesn't do that without a good sense of wisdom and a gut feel. But that doesn't mean they're not still missing things. And so if I can get really good information, accurate information, to my CEO who is already making pretty good decisions, they'll usually make fantastic decisions. So I've automatically made the CEO more effective and he won't even feel as if I'm forcing him to do anything. I'm just providing him with information and he takes off and he's smarter, he feels smarter, and that's great. I don't need the credit, I just need him to be great. So that's why. And the second one is I need the information too. There are trends. I like to look at data and trends and how that translates back into people and executing on a plan is for my benefit. And the third one is when you do a deal, there's a lot of brand new eyes that you didn't have before. I report to the banks, I report to my investors, and all these guys need timely, accurate information. Now, we try and bear a lot of that burden behind the scenes and not burden the management team with that. But a CFO kind of stands in the gap to provide that reporting as well.

Tony. So if I'm putting together the overall approach here, it's that you're acquiring good companies with at least $2 million in profits because that's going to allow you to invest in the company and also pay down debt. You're leveraging other money in order to be able to acquire these businesses and not be personally responsible for growing them. You're adding your expertise and bringing in infrastructure to help that company grow, paying down the debt over five years and hoping to have an exit five years from now. My question is it sounds like an art form that follows a formula or a system. So why don't most entrepreneurs grow on their own before they come to you? What usually keeps them stuck that you come in and fix? What part of the system is unique to a private equity group that an entrepreneur is missing?

So I don't know if it's unique to private equity group, but I can tell you that entrepreneurs are special.

Breed of people. And I don't know if you're born that way or if you're made into that. It doesn't matter how you get there, but they all tend to end up looking a lot like this. So an entrepreneur is someone who's more risk tolerant than average, very optimistic, doesn't lose a lot of momentum in between failures. And that's really the skill. It's not. It's not that they don't fail. Sometimes I fail a lot. They just don't lose momentum. But what happens is they can pitch hit and run. They know how to do a lot of things pretty good. They know a little bit about accounting, they know a little bit about sales. They certainly know their product, they know the marketplace. And so they're kind of a jack of all trades. And you can't really start a small company without someone like that. You can't have a Fortune 500 guy come in who is a specialist. It'll never work. It takes an entrepreneur to do it, bar none. What happens though is as the company grows and all those roles that he's over expand to take more than just 10% of his time each, some of those roles require 80% of his time each. And so you get to a point where the entrepreneur, the only guy who could have started the company, is actually the limiting factor, number one. And you need to start pulling things off of him to help professionalize it, pull it off and give it to a professional. Sometimes I have trouble letting go. So we usually need entrepreneurs that have gotten to a level and had some pain over not enough hours in the day, just can't get to it all. They know that they're slipping a little, number one. Number two, an entrepreneur knows when their risk tolerance changes. And when you start and you risk it all because you have nothing to lose, what happens is when you got $2 million in EBITDA and you might be pocketing, I don't know, a million a year, you have people that report to you, your family is proud of you, you start to feel the pressure of success and you start to tighten up and you start to play tight. And what happens is that takes some of the risk taking away and some of the entrepreneurial spirit away. If you have again, like a private equity group that comes in and takes 75% of your chips off the table, you regain that risk tolerance. We pull some of the jobs off you, so you regain some of your brain share and they take off and they look real productive. And then I usually try and take all the credit for it to my investors. You know, that's what happens. But it's really, you're just reinvigorating the entrepreneur at a base level and that's why they get stuck. It's just a natural progression. That's how we try and help.

Yeah, I remember you telling me that when we first met, that you felt as though entrepreneurs got to where they were because of a certain risk tolerance, because of their ability to kind of run full steam ahead and then their risk tolerance changes and they kind of go into defense mode. And sometimes selling a portion of the company and taking money off the table makes them feel safe enough and like they don't bear all the responsibility, all the burden anymore so they can go reinvigorate that entrepreneurial spirit into going into that next sphere of growth. I remember our first sit down chat being about that and I was like, huh, that makes total sense. Because if, if not all of the responsibility is on my shoulders, I would be more aggressive in growing this company.

You're right. I mean, that's exactly what happens. And you have a good memory.

Tony, have you?

What I explain to an entrepreneur a lot of times is, look, I'll have some good ideas about your business, but it'll be a long time for me to know it as well as you do. My goal is to take all of your good ideas and try and help you implement your ideas quicker and better than you could have. And then I'm going to take all the credit for it. But we'll both win. And usually that's a pretty good trade off. They're happy with that because the company grows. Everybody wins.

Tony, have you ever regretted a business purchase?

Yeah, there have been times when, again, the largest X factor in all of this is the personalities, and it's the psychology and sociology of working with other people. People are the biggest X factor. And so you've got to have a pretty diplomatic approach to things. You got to be pretty hard on issues, but soft on people, unless people are the issue. And so if people are the issue and they have. They're corrosive, and you find out later that, you know, they might be doing inappropriate things.

Sometimes you don't really have a chance to work it out with that person. There's some behaviors that just are problematic afterwards. And so that's unfortunate when that happens, but. And I have a lot of sleepless nights and a lot of pain about what to do in those situations. And so you lament over it. You try and get around it and say, can I be okay with this? And so you're negotiating with yourself like. Like any good person does, because a change is so drastic. But you say, you know what? This person is doing something like do something like fraud or something extreme, they just got to go. And what happens is when you pull that trigger, then you go to the next in line, everybody else. Inevitably, in every case, when you finally lament and let the person go, a lot of people come up and say, I'm glad you did that. I wish you had done that sooner. I'm like, how come I'm always the last to know? Yeah. You know, people are suffering in silence. And then you do it, and then it usually turns out okay, but it. You never know. And so you always. You hesitate because, again, I feel the pressure of everybody else's expectations.

Well, Tony, I am totally fascinated by. By this. One thing that we kind of glazed over that I'd like to hear your thoughts on is there's a lot of interest in the space right now in private equity. Groups moving into a variety of different sectors because the economy is so good. To somebody who is interested in this model, what would you advise that they look out for or be cautious of? Because everyone is optimistic right now. Everybody, every entrepreneur is optimistic. But I would say when you start playing with other people's money, you start to get even more optimistic. So what do you see going on in the space and how would you advise people who are thinking about this.

Model if this is a true entrepreneur that's had some success? I don't need to remind them that any new endeavor is 10 times harder than you think it's going to be on paper. That's a visceral one that they've lived already. It's just the same going into private equity, but it is rewarding. And so what you need to watch out for is making sure that all good deals get done. You want to make sure that you have a good deal, which is a fair structure, but just a properly valued company that really has some sea legs to it, that has some opportunities. And most people, even very conservative banks, can hear a success story in the making. You know, senior lenders, a little less concerned about the upside of a business, but they certainly like a business that's going to be healthy and grow to pay them back. And don't get too enamored with your own ability to make drastic changes from a company like doing turnarounds is exceedingly hard. So if the company doesn't have some hidden gems or some advantages there, don't think that you're just through your own ego and your wisdom, you're going to come in there and do a bunch of stuff that that guy wasn't doing already. Go ahead and give them credit. A lot of people spend a lot of times and a lot of sweat worrying about the company. And if it's probably a good idea, they probably already thought about it. So that question, that's a very long answer to a simple question, but I think that there is also a lot of the reason a lot of private equity, larger private equity groups are moving into this space or what we're say, coming downstream. So guys that normally used to only buy 10 million in EBITDA and above are coming downstream is because it's very competitive for deals at that level. The prices are very high and they can't find any deals up there and they need to get that money to work. So they're coming down market to lower EBITDA deals, which isn't their favorite because you got to do more deals to get the money deployed, but that's the only place they can find deals. And so they come down and they create competition. But at the end of the day, it doesn't matter who you're going against. You'll win if you truly understand the business better than the next guy. And you bond well with the management team because really, the seller is picking their new boss. You want to make sure that you're a compelling boss versus someone else.

@ the end of the day, it all comes down to people once again and your ability to connect with them and your ability to persuade them and your ability to collaborate with them. And that's what drew me to work with your group over the other groups that were pursuing us. And I've been very compelled by you as a person and by what you're doing as an entrepreneur and as a business owner. And I'm so glad to be able to share that with the listeners here at the 1%, Tony Ludlow, where, if anywhere, could people connect with you or follow your.

Work? Well, we have my website, we have Baymark Partners.

You can always reach me there, my web address or my emails on there as well@tonymartpartners.com Be glad to speak with anybody directly. I like what I do. I like the industry. I could talk about it all day long. I've tried to help a lot of people do it because I understand that if you've gone so far as to be thinking that you want to do it, it's usually a sickness or an itchy have to scratch, scratch. And so I want to help people go through the process as successfully as they can. There's plenty of deals out there. I'm not worried about competition. There's something for everybody out.

Here. Well, Tony, I so appreciate that approach. Thanks so much for what you do. Thanks for hanging out with us at the.

1%. You bet, Ryan. I loved it. Talk to you.

Anytime.

What's interesting about this model, besides.

The fact that it's created some of.

The richest people in the world, is frankly, how simple the model can be if you remove the emotion from it. Of course, that's easier said than done because we're dealing with people and humans here. But as a new entrepreneur, I think we often fear the idea of debt. We fear the idea of financial institutions. We fear the idea of leverage. We fear. Fear the idea of risk. And when you hear Tony talking, if you hear a lot of the, the big private equity groups talk, it is. It's just like running a business. It's just done at scale. It's just done smarter. It is done by leveraging people. And we as entrepreneurs are, you know, we're so used to going on our own. We're so used to throwing things on our back and saying, I'm gonna make this happen. And so when we do that, we put all the burden on ourselves and we tend to run into bottlenecks and roadblocks. And what I love about what Tony has done is he's, at least for me, removed a lot of the heaviness or the fear around going after big deals like this about acquiring business for tens of millions of dollars. He even talked about how he's not on the hook for that. It's the business that has to perform, and it's his job to make sure that the business performs. What a concept. So that to me, just frees me up to go run harder and faster towards my goal of owning the Cleveland Indians. Because I do believe that private equity is going to be a route, if not the route to getting there. I don't have the nuances worked out yet. It's why we're documenting the journey here on the show. But I am convinced that this is going to be part of the model that gets me there. And Tony has kind of illuminated a lot of possibilities there without the same type of fear, fear or tenseness that I used to have around going after those big types of goals. Would love to hear your thoughts on this topic. You can reach me on Instagram. I'm ryandaniel Moran. I'm the same handle on Facebook as always. I just am so honored to be a part of your journey and I appreciate you being a part of mine as well. Thanks for listening to the show.

And I will chat with you.

Soon. I am often asked about changes with reviews or changes with Amazon terms of service or changes with what's working with ranking and all of that kind of jazz. And I'm proud that I have partnered with one of our backroom members. His name is Jeff. He runs an agency that specializes specifically in optimizing your Amazon presence. So if you're a brand that is neglecting Amazon and you've heard me talking about it and you're like, we know we got to get this together. Or if you're an Amazon seller and you know you need to turn your attention to audience building and funnels and the stuff that is really going to grow your company, I would recommend that you give a quick shout to my boy Jeff at Turnkey Product Management. They're at Turnkey Product Management and as I said, they're in the back room. They work with my team and the rest of the big companies and equity groups that are involved in our little circle. And they're usually ahead of everybody else in terms of what's working, what's compliant, what review strategies are cool and kosher and are actually effective. And they're not out there hawking a bunch of info products. They're out out there actually doing it. So they're an implementation agency that just handles it for people and they run their own businesses, some of which they have built and sold, kind of like yours truly. So I feel really good about partnering with them and recommending the big companies and the brands that I work with to outsource their Amazon management over to Jeff and his team. So if you're looking to out some automation into your arsenal, I would recommend the good folks@TurnKeyProductManagement.com and Jeff and I are on speed dial with each other and are collaborating on what's working. So you're always getting what's the latest and greatest in the Amazon world. So contact those guys if you're looking to outsource, automate and optimize your Amazon presence@TurnkeyProductManagement.com.