Building Successful Buy-and-Build Platforms: Alpine's Blueprint for Strategic M&A with Haley Van Cleve

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It out@dealroom.net now back to the episode. I'm Kisam Patel and you're listening to M and A Science where we talk.

With deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Hello and welcome to the M and A Science Podcast. This podcast is part of a mission to rethink how M and A is done. The old school settle that approach. It's dead. Bio led. M&A is all about strategy, alignment and efficiency, putting value creation at the center of every deal. And let's be real, it's not just about closing the deal, it's about making it successful. We uncover what truly works in M and A by learning directly from the best. I'm your host, Kisam Patel, Founder and CEO at Deal Room and Chief Scientist at M and A Science. Joining me today is Haley Van Cleave, Partner at Alpine Investors. Alpine Investors is a 17.8 billion AUM private equity firm investing in software and services businesses. Alpine specializes in acquiring businesses and scaling them through a flexible approach that blends operational support, deep integration expertise and a standout talent model. Alpine has hired over 150 high attribute leaders into its portfolio company through its popular CEO and training program which is the number one most applied to jobs among graduating MBA students at Stanford Graduate School of Business, Ardor Business School and Wharton. Today, Alpine has closed over 850 deals, including 170 deals in 2024. Today we're going to talk about what it takes to build a successful buy and build platform from the ground up. Hayley, how are you doing today?

Good. Hey Kisan. So excited to be here and thanks for coming out.

Thank you for hosting me live here in Manhattan at your office. This is headquarters.

We are SF headquartered but we have a New York office and we're almost 5050 at this point.

Wonderful. Thanks for hosting me in a New York office for sure. Great location. Can we kick things off A little bit about your background.

So as you said, I'm Hailey. I've been at Alpine for about a decade now and I joined straight out of undergrad. I studied computer science, engineering. I thought I wanted to do many things, didn't know what private equity was, but got connected to Alpine through a classmate of mine who put me in touch. Ultimately got to talk to some of the partners at Alpine and just felt like it was a place where I could learn a lot from smart people who seem like good humans as well. I really knew nothing about finance or private equity. In my interview, I always joke I used revenue and profit as synonyms in my case studies. So I was very green, didn't know anything and joined it as an analyst and had been here ever since. At the time that I joined, the firm was about 20ish. People were investing out of our fifth fund, which was a $400 million fund. And if you fast forward to Today, we're about 180 people across three offices and investing out of a four and a half billion dollar fund. So it's been an incredible journey, a ton of growth for Alpine and just an incredible ride.

How many years and how many deals you worked on?

About a decade deal wise, I've lost count, but probably 45 plus.

Awesome. I'm curious. I'm always intrigued by people with an engineering background. I can tell they interview different. Even though you didn't go out and practice in an engineering role, but do you think anything from that background in undergrad helped you with being an investor?

Definitely. We have a ton of people from technical backgrounds and engineering backgrounds. Deals are a lot like a problem. You have a hypothesis, you're going to get data, you're going to test assumptions, you're going to try to figure out logically what makes sense next. Just that framework of logical thinking totally applies to deals and applies to businesses as well.

So there's other people like you in this organization.

We hire primarily out of undergrad for our Alpine team and they're folks from all different backgrounds. Some were finance majors, business majors, but some were engineers or political science majors. We're big believers that it's about attributes and it's about people who are intellectually curious and excited to learn about deals. And you can teach people of any background how to become deal makers.

I like it. Just curious how that lends into the culture here at the firm. Let's talk about platform deals. What defines a platform? How do you identify business that would have the strong potential to be a platform?

Traditionally, when people talk about platforms, they usually mean something with scale and something with certain capabilities. So maybe a business that has M and A capabilities, we take a pretty liberal view of what a platform can be. We focus on what are the things that are really hard to build that we are not good at and take decades to build and what are the things that we can add to a business. So for us, a platform needs to have high revenue predictability, it needs to be in a good market, it needs to have good bones. As a business, raving fan customers really repeat and high retention revenue streams, those are things that are very hard to build and take decades to build. On the flip side, for us, we do platform deals that are smaller. So we'll do a platform deal that's 3 million of EBITDA or in software, 3 million of revenue and we can help supplement and build a platform team. We can add M and A capabilities to a business that maybe hasn't done M and A. For us, a platform is really a business with good bones that we think we can add things around and ultimately build into a more traditional platform.

You got strong customer base, you got good operating mechanics. This looks like a good, well run business. I'm curious about the size part because I was under the impression that you needed like 20 million revenue to be looked upon. And is it fair to say, like maybe firms have a different definition of a platform too?

Scale is definitely all relative. So relative to the firm, relative to their strategy, relative to their capital base. For us, oftentimes we're building a lot of platform capabilities. Over time we will start smaller and we're investing out of a four and a half billion fund. We will start platforms with a $2 million EBITDA deal or $3 million EBITDA deal, where we know that we can build that into scale pretty quickly through M and A. On the software side, that might be 3 or 4 million of revenues. A lot of other firms want to start with a little bit more scale, but for us, that's really one of our core competencies is adding M and A and ultimately growing a business pretty quickly into a scaled position.

Let's break down software versus service one. I think it's pretty cool that you have two clear focuses, but they're so different. You sort of reference right away you're like EBITDA versus revenue. And I'm a software person, so I'm going to be very biased and even sometimes use my own company as an example. Since we're sort of at that growth stage thinking about acquisitions. I think it's so true. In a service business you are thinking of bottom line profits and software business maybe not as much. Is it the expectations? Software businesses tend to operate in losses, break even or just not as much profit focus.

In software there's a ton of variance. So there definitely are businesses that have operating losses, are running break even. But there's also really, since the public cloud came out, the ability for founders to bootstrap businesses and run them at decent profit margins, even at 3, 4, 5 million of revenue. So we see a variety. We tend to focus on rule of 40 businesses in the software side. So businesses that have some margin, maybe it's lower margin today and they're going to scale into a more normalized margin over time. But definitely on the software side, when you're 3, 4, 5 million of revenue, we're thinking about how much can we scale that revenue over time. And then from a bottom line perspective, once they hit 10 million of revenue, what do we think the normalized margin should be?

So let's break down the rule of 40. For those not familiar. My take on it is the combination of your growth rate with your EBITDA margins and it should be over 40 puts you as a rule of 40 company bingo.

Yeah, over 40 is excellent. The higher the better and the more weighted towards growth typically the more favorably we view that.

Does that still apply with services companies?

It still matters. So growth and margin and the interplay of the two are at the core of how you value a business and how you think about future compounding of capital in services. Typically it's not 40 that we're targeting. We don't have an exact metric that we target in the services side, but we very much think if you're growing faster, if you have more margin over the long run, you're going to compound capital at a higher rate.

That makes sense. I guess we'll talk more about the whole grand scheme of things of where the end goal allows you to sort of value things. Today we have a business we identify that looks like a good business as a standalone. The Rule 40, ideally it's a software business. Does that include like your adjusted ebitda?

We see a lot of adjusted EBITDA out there. Especially bankers are very creative and how they present ebitda. So as we talk to businesses, we very much get to our own EBITDA number, which a different buyer might look at it differently, a seller might think about it differently, but EBITDA is a proxy for the cash flow of the business. What do we think that appropriate cash flow is Going to be okay.

So you have to use your own approach and own guidance on figuring that out. And then is there other things that you would really prioritize when you start looking at these businesses? Because I know management team's a huge one. Looking at the whole marketplace as a whole to get a sense of how far can we grow? Like how do you think through those things?

As we think about what's most important for us, it's team market and then business in that order. Team can be. The business might have some exceptional talent and that's wonderful. We also have capabilities and we do a ton of founder deals. Where we had a small software business, we had a founder who said, what's most important for me is that I am moving to New Zealand a month after this deal closes. And don't call me, I'm going off the grid. I'm living my next chapter of my life and that's what I want. We have the capability to solve for what a founder is looking for. In a lot of cases, that's a transition, that's retirement, that's shifting to a different role. So for the team, we have a ton of talent programs to be able to bring in a full management team. Day one, if that is needed on market. When you're starting with a $3 million EBITDA business or a $3 million revenue business in software, we have to have high conviction that we can do add ons and scale this pretty quickly. Underwriting the market, the fragmentation, the dynamics, why putting businesses together is better for customers, for employees, for the company. That's a huge part of our underwriting thesis. And then lastly is the business. So you need to make sure it has good bones, that you're starting with a good company. But really nailing all three of those is the core for us of making a good decision on the underwriting.

I get the team market with the.

Business part business, so the specific company. So it might be an incredible market. Are we picking the right business within that market to start with?

I got it. The specific companies that they want to start with. Okay, so this makes sense. The team part's interesting. So if a founder has a lot of potential, could potentially lead the effort, that's a big plus. But you could handle a situation where the founder said, hey, I'm out. That's what I'm looking for as an exit, would you value that deal differently then?

Probably 80% of our deals are situations where the impetus for the founder selling is often that they want to retire or they want to move on. To a different chapter of their life or they were CEO and they love product and they don't want to be CEO anymore because there's all these functions that they don't love that are taking up their time. So we tend to spend time on situations where our talent model is a differentiator so other buyers really want to back the existing team and the existing CEO. We love situations where our talent model can help differentiate us and help us be a partner to a business where other firms are less of a fit.

Okay, so you're used to it. It's like a must have.

We don't look at it as a negative. For some people, there's a mentality. If the CEO doesn't want to stay on, what does that say about their belief in the business? We realize for a lot of founders it's all of their net worth that's been tied up in this business for 20, 30 years. We get that there's life outside of it and that there's human dynamics as to why somebody might not want to be around for the next five years. And we have a model that's pretty sympathetic and can help solve for that.

How do you look at bootstrap businesses versus ones with the messy calf table? Does that impact value?

We have done both. We're probably 90% founder owned and operated businesses. Again, our talent model tends to be a really good fit for those situations. And those businesses from a bootstrap perspective tend to have a little bit of margin, which is helpful from a valuation perspective.

Okay, that's fair. So got to have this team in place and there's flexibility there. If that is trend, transition required market, you want to make sure there's significant fragmentation. So you're confident that you can find acquisition opportunities and then making sure this is the right business to start with.

Exactly.

Sounds pretty straightforward. Can we like just walk through an example? Do you have something that you've worked on before that sort of played out pretty well that we can walk through the steps?

Yeah, for sure. And we have software and services you brought up at the beginning. Kind of. It's interesting that we do both because they're so different, they are different markets. And yet the motions that we go through end up feeling a lot the same. A software example. We built a legal tech business. So time billing software for lawyers, kind of SMB, mid market lawyers. We started our first business in that space was 4 million of revenue. So starting quite small, but a great market. We saw a ton of fragmentation. We saw huge tailwinds as people were Splitting off of big law, starting their own firms and as people were going from on prem solutions to cloud based solutions. And it's a really sticky product. Once you have a lawyer on your time billing software, there's the ability to attach a lot of other offerings around that. We felt from a market perspective this is awesome. We also, prior to the market had built a team. So we had a CEO, coo, a cfo. We got a team in place on our bench ready to go, who were just exceptional operators and leaders. So we had the team there, we identified the market, got really excited, started with a $4 million revenue business, which is on the small side, but ultimately did four additional acquisitions around it, expanding into adjacent pockets that we're excited about and then adding additional products that we could cross sell into that base. Integrated all those businesses together pretty heavily and ultimately built that to be a $30 million plus platform and sold that as a platform for another PE sponsor that has gone quite well. A great example, when you get the market right, when you can piece together solutions that make a lot of sense, we can build really valuable platforms. And that's our focus. That's kind of the software narrative side, the services side, it's much the same, but we might start with a 3 or $4 million H vac, so air conditioning, heating, cooling, plumbing business. Start there, build a whole executive team around that business that's capable of doing pretty high velocity M and A and then have built a number of businesses like that on the services side to be a hundred million dollar plus EBITDA businesses in pretty short time periods. So really have built out heavy integration functions, heavy M and A functions, but operationally really integrating them to be tightly knit and have a lot of strategy for why an add on is worth more to our platform than it would be to another buyer.

Use the word integration a lot. Can we talk through the importance of integration with these add ons? The thing I'm curious about is we work with a lot of rollups. I think now the market's really wising up. At least buyers are wising up that there could be a company that's rolled up that's not integrated or has a backlog of integration work and then value ends up getting written down because of that. I'd love to just get your perspective of how do you think through integration and what's good and bad.

And I'm a deal person, I love deals, but the deals are the easy part. In rollups. It's not hard to find a business close a business you can Do a lot of M and A. The very hard part is integration and operations. So how do you make this a really well run platform? And the key for us on integration is people and systems. So from a people perspective, you have to be very clear functionally on what's living globally, what's living locally. Have we been clear and transparent? Is everybody rowing in the same direction and understands the vision of where we're going? And people wise, that's hard. Systems wise, you need really tight systems. So some of our most acquisitive platforms will do 30, 40, 50 deals in a year. If you go on an M and a tear and you lose visibility into your key operating metrics, your leading indicators, your financial performance, you're like a pilot flying in the dark without instruments. So it's really important for us to build an integration capacity to where we're getting everybody on standard systems, the same erp, the same financial systems. We've set in place the key operational metrics for a platform and we can really track and measure. Hey, we acquired this business with a thesis that we could drive revenue in this way, that we could benefit from economies of scale and procurement savings in this way. Let's make sure that the leaders really understand that vision and that goal. And then let's make sure from a metrics perspective, we're tracking to that and we know where we got things wrong so we can adjust in the future and we know where we have bright spots that we can scale and replicate in other businesses. The systems is a huge part and typically we're building an integration team to roll out systems within 20 to 30 days of closing an acquisition.

Because you want that data synced up so you can align around those metrics that you're targeting for the add on.

Definitely. If you're running a large platform as an operator, you need to have kind of your dashboard up to know where are we performing, where do we need to address things? Who are my top performers, who are driving at the local level, awesome results. And how do we keep growing their careers?

They need to roll it back and update to you.

Yeah, exactly.

So that sounds like a big component of your value creation approach, really emphasizing the integration. One of the things I've published earlier in the year is a framework called buyer led M&A. And one of the pillars is synchronizing diligence and integration so that you can ultimately execute integration better. I'm just curious, how do you do that? How do you think through or plan your integration to set it up for success?

It's A great question. And it's so important and it's easy to be the deal person, we want to get deals done and it's easy to put something in Excel and it looks so reasonable. You're like, on this timeframe we can obviously drive this much revenue growth and we can do this with margin. And for us it's really important to have operators involved in diligence. So having the person who's going to sign up and go deliver this plan be part of that diligence process with us and understand the assumptions, understand the business, make sure they feel comfortable with the game plan. And then secondly, being very operational in our diligence, understanding what levers of a playbook we think we have, understanding how we diligence those, and then making sure the post close capabilities exist at the business.

So you're tying it all in while you're doing diligence. You're really mapping your integration and making sure there's continuity there. How do you not break things? Not try to be too sideways here. I interview a lot of integration folks and it's always the culture was mismatched and things like that and things just get broken during the integration process. Is there some approach to make sure that doesn't happen?

To give a little history. In our early days we were very scared of breaking things. Our mantra is don't fix what isn't broken. That works to a point, but it often makes it hard to scale M and A in a way that's really productive. And in the early days, for example, we partnered with some businesses that had spent a lot of time on their charter of accounts and their financial system. They were so proud of it. They had gotten on a great system. They loved it. It was set up in a very customized way to their business. And we were trying to get to standard systems and we spent so long trying to marry up their system to this other business's system and both loved what they were doing. And one of those implementations took something like 12 months to try to reconcile all of this. There was a realization that we had which is there's power in just transparency and clarity. And if our vision is to build a really big business that's a leader in the market, we have to be able to do deals pretty fast. And that means we're going to have to standardize systems and we're going to have to tell people upfront, your system is awesome, we love that you built this, it's working for you. That's wonderful. And doing a deal with us is going to look like this, we're going to have standard systems. Here's the why, here's how it ties into our vision. And for some people that's interesting and they get it. And then for some people it's not, and that's their prerogative and we might not be the best partner. But really being clear and transparent as to the why and also designing with the end in mind. So to be $100 million EBITDA business in one of these services buy and builds, you have to make some decisions on the front end that are going to change things at the companies we partner with. We try to be really clear in the upfront deal, here's what's going to change and why, and here's the things that aren't going to change and what we think is special about you. And we're not going to touch these aspects, mess up these things.

These are some powerful things you're saying right here of just the designing with the end in mind, having this clear vision, really being able to explain the why throughout. Can you walk me through, like how do you run that deal process with it? And part of it is like I'm learning how do you like bring this up early or when's the right framing of it so that it just sticks throughout that process? Cause I feel like it's so easy to just jump in a deal, want to start modeling things out, come up with a price and saying, all right, this is how much we're going to just get to loi. Negotiation versus this stuff is like the soft stuff is the most meaningful in terms of people alignment. Teach me this, teach me how to introduce this stuff and get it sticky. So the new people that join the deal don't forget and they're like, what are we doing?

And it goes back to also why. We start with team, then market, then the deal. Because you have to have a team who's thinking about these things, the operations team, who's going to inherit this, who's making some of these decisions because they're going to have to live with this for the next five to 10 years. And then the market, you have to understand what matters in this market. What are the parts of a business that we don't want to touch because they're working and there's high risk. What are the parts of the business that we can make better for the end consumer, that we can make better for the employee that we are going to change? A lot of that happens before we ever find the first deal in a market. So we're trying to get clear on what's our approach to global versus local, what's our vision, what's our pitch for a founder, for why we think we're the right steward for their business long term. So we do all of that up front and we get really clear on that because if we're not clear, we can't articulate that to somebody else. And then to your point, often before we're getting into valuation and data request and diligence, there's a face to face with the founder or the sellers of the business. We're articulating what our platform is and what it's not. A lot of people in these markets take different approaches and that's great. We're trying to find partners and businesses who are aligned with our philosophy, who are excited by it, who maybe don't want to switch out their general ledger system. But understand, hey, if I want to be part of this bigger vision, I get why I'm going to have to do that and why I'm going to have to sign up for some of this. A lot of that happens, that vision conversation, that expectation setting conversation happens ahead of an LOI or getting deeper into diligence and some people opt out and that's totally fine, but we'd rather do that upfront versus getting a deal closed and then having to go operate together and realizing there's misalignment.

That's so interesting. Doing this upfront and really emphasizing it helps you throughout the process. But when it comes down to the real grinding with integration, you go back to that same vision, your thesis and what end state you had in mind. That's where you get proactive on integration. Because again, the fail point I see is companies are afraid to break things, definitely. So they essentially do a very minimal integration and then there's backlog of actual real integration work to do. You don't do that.

We try not to. And I tell you all this now, and this is also learned over a lot of years of stubbing our toe and making mistakes along the way. And like I said in the early days, being reticent to make some of those changes up front and being reticent to, to tell a founder, hey, we're going to tell you five inconvenient truths. You're not going to want to hear these five things, but this is what we're going to do and this is how we're going to do it. And we found when you explain the why and the bigger vision, people understand it and it's easier to have an uncomfortable 30 minute conversation about those things up front and then have a ton of alignment for the next 10 years than it is to get into things and realize we have to make changes a year end that just slow us down and are hard to kind of wrap your head around.

Let's blow up the bad. We don't want to glorify this. This isn't easy. What's the hardest things to making all this work? The platform and make the add ons.

Two things. One, we spend so much time up front aligning on a vision of what we're trying to build. If we're trying to build $100 million plus EBITDA business, we need the team to get us there. And we are often starting with a 2, $3 million EBITDA business to begin with. On the software side, flip those to be revenue numbers. But we over hire the team in the early days. So we will hire that team to be the a hundred million dollar plus EBITDA business before we even have our sights on a deal that's expensive. So we'll hire five execs to sit on our bench and work with us for 12 months to find the right market and find the right business. And then you have a two, $3 million EBITDA business and you have a very heavy exec team. You're building out an M and A team and integration team. It's pulling a lot of that build up front for us, which has worked because it lets you go really fast. But it's hard and it means you have to be confident you can scale the business because you've just taken on a lot of costs. And then the second thing is the integrations to really scale and push M and A, you have to build the integration capacity upfront and you have to be able to integrate businesses and onboard them quickly. That's something that in our early days it just took far too long for us to integrate and to onboard. And it really slowed down our pace and it slowed down our visibility.

What do you do? Like how do you prep a platform to be able to integrate?

You have to understand the market and have a vision of what actually are we going to integrate? Because you don't want to integrate just for integration's sake. You want to have a why you want to be able to motivate and rally people behind a vision. So getting really clear on that, doing the homework in advance and then it's building the team to do that. Oftentimes we're ultimately building an M and A team and a Separate integration team. And those are people that are systems integrators. They understand the nuts and bolts operationally of what's going to happen at the business and they're able to go win with the partner businesses we're partnering with and actually go execute, roll up their sleeves and make that happen.

So it's getting that leadership. Just even in the mindset, this is what we're going to do, we're going to be integrating these companies. Maybe think about your domain, when it's going to take to do that. So two big things. It sounds like a big upfront investment that you got to invest ahead to have the team that can go execute on the big picture. When you're putting in these executives and they're in a tiny business to start with may seem a little off, but that's something you got to rationalize. And then building that integration muscle early is the second big one.

Definitely.

So we get the platform and then we add on businesses. How do you know the right pace of doing add ons and then is there a point when maybe you ought to slow down for some reason? Is that the integration is the bottleneck or finances?

It's a topic of probably the majority of our board meetings is are we going too fast? Are we going fast enough? How does this map to our vision? So it's definitely a topic we are constantly talking about in services. For the first six to 12 months, we actually go a little slower. So there's a world where you partner with three or four or five businesses in a space. We make sure our team is a really strong foundation. We make sure the systems we really have dialed integrations we have really dialed. And we're also learning this is our first time entering a market. Let's make sure we really understand the nuts and bolts of these businesses before we go crank pace so often. Kind of a 6 to 12 month period of really dialing and building the right foundation because you don't want to build a house on quicksand and you want to make sure it's solid. In the software landscape, it's a little bit different. Typically we're doing lower volume M and A, so we might not be doing 30, 40, 50, 50 deals a year in a space. But being really thoughtful about for our customer base. What are the two or three or four products that make sense together. And in the software universe, when you're targeting very specific product categories, you have to be a buyer when there's a seller of those businesses and there might not be 10 payment softwares for lawyers, there might only be two or three that we really want to own. And you got to be opportunistic at the right time of when a deal can happen.

Interesting point that you kind of may start off a little slower just to really figure things out and then figure out the right cadence. But it sounds like it's a lot of variables to determine this. It's not just one playbook that you apply to each company.

It's not one playbook. Overall, what we've tried to do is make the process a lot the same. So we do a lot of visioning upfront before the first deal. Let's get clear on what our intent is, what our vision is for what this platform is going to become. And then a lot of the decisions you make in the first six months, 12 months, 24 months, come out of that. Once you're clear on that vision, let's work backwards for what do we need to do in each year of our investment to end up there?

Is there things that may shift or change in that six to 12 months? And I kind of want to pick on that legal example because it's an adjacency for us. Even you got one business and you said they were doing more of time tracking. And then is it like in the six to 12 months, does it the strategy shift? You start looking at market map different. Like how'd that play out in that example?

Yeah. So in that example, before we did the first deal, we had mapped the market. So in services, sometimes there's 15,000 of businesses in your market. It's a big universe in software, in legal time billing, there's maybe a hundred players there. So we had mapped them. We before the first deal had talked to probably 50, 60% of them already. So knew their size, knew where they played, knew the focus. And we kind of had our list and our vision of here's what we want to build to become. Here's the names that we think are a really strong fit with that vision. We don't know exactly which of those names is going to transact in a time period that works for us, but we know every quarter we're going to call them and talk to them and build the relationship over the long term so we're who they think of when the time comes. We started with one of those businesses and then really focused on that pipeline and building those relationships and ultimately piece four other of the products together and build those under a single leadership team. So in software, it's a little bit less at times. We control the pacing A little bit less. And it's more about being very thoughtful on. These are the companies that we think are a really strong fit and let's be on them every quarter to know where they're at and to be selling our vision and make sure that when the time comes we're the first person they think of.

It is so different because I feel like services, I always think of rollups. We H vac have a roofing one which is just very similar businesses in different markets. And you'll hone in on geography where software. There's no two software companies that like they're very different. And then in this example was it, hey, do we know this one specific vertical of time tracking? We're going to really go deep into that. How do you start thinking of like adjacencies and that view and when is it time to go out of the core in software?

A lot of times we think about there's kind of adjacent end markets. If you think of a grid, there's kind of one axis is the end market and one is the product category. You think about which product categories do we want to be in for which end markets. In the legal tech platform that I was talking about, we expanded both to adjacent end markets. So we had mid size corporate law firms, we expanded into personal injury law firms and SMB law firms. So we kind of expanded to different customer profiles and then we also expanded to different products. So we had a time billing software. We added on a practice management business, we added on payments facilitator so payments product to allow electronic payments for the time billing side. So we look at both vectors and think about where on this map do we want to play and why? What's our vision of what we're trying to become? Are we trying to cover the entire map or just these four boxes on that map and then what companies are in each of those boxes? And let's be really intentional. Choose your term buyer led. Let's be very buyer led about trying to make deals happen with the players who we think are tier one players in each of those boxes.

Meaning you're proactive, you reach out to them. You're not waiting for a book to get sent to you.

Not waiting. And some people will still hire the bank. And that's fine for a lot of people. It takes seven or eight meetings and a number of years before the timing is right. For us it's just being top of mind when that time comes.

When you say in market, use an example. Here's like maybe a small firm one that specializes in different area of law and then you have the products. If I think of like ICP or who the actual buyer is, where does that fit in? Is that part of your in market view? And then you say okay, like in this situation it's whoever's doing back office stuff or whatever.

Exactly.

Is it an icp? And that's where I was curious. Is that the big thing? It's like we identify it's going to this product's going to sell into the same. Because you could have a different in market but it's different ICP which then all of a sudden you got smoky mirrors that you're not going to cross sell as well as you thought you would.

And it totally depends on if cross sell is the thesis with an add on or not. I'd say for lot of our software businesses it is. We love this icp. We're really good at the go to market on this icp. Let's look at the three or four other products we know that same human is going to buy and let's go be able to offer that to them. And for the same customer acquisition cost we can now 3 or 4x our lifetime value because we have more product to sell them. So that's a thesis for a lot. In some cases it's not though. It's we're really good at this go to market motion in this size range. In this market there's other ICPs and other buyers of products who we have the right motion to go sell to, but we're not today. And let's expand via M and A into kind of an adjacent end market.

So you can get in this adjacent market but it's more about a go to market playbook that you can bring in. That's interesting. That's what I was curious about. It's like how do you keep these acquisitions to be strategic instead of running that conundrum of we're just buying revenue. That sounds like there is a view on that. Maybe it's not purely cross selling into the same icp, but there's other factor that gives you an upside that you're going to be able to leverage. Like the go to market playbook.

Definitely for us it's about being clear in the underwriting on what are the levers we're trying to pull. And then because we work so much with operators, typically have the operators on our bench before they go into the business, it's making sure they're really sold on that. So when we're talking about cross sell, let's diligence it together. Hey, you're going to be running sales of this business in four months. Let's make sure you feel really confident on your ability to cross sell these products or to explain this go to market playbook to adjacent businesses.

I talked to a range of private equity firms and I'm starting to see some patterns based on the fund size and if smaller funds, especially sub billion, all that money is handled in house. But as a firm grows then it could be that the maturity of that business where they'll stand up an in house M and A function. What's your view on that? Like when's the right time that you would want to stand up in an M and A function, let them run things and be more of like a coach than a driver.

It's great when it goes well because it gives the private equity firm a lot of leverage. For us, it goes back to what's the vision. So if we know we're going to do double digit number of acquisitions, add on acquisitions during our hold on a platform, typically we're going to build the M and A team at that platform for us. We typically do it day one. So we're launching a platform right now. We're going to close the first deal probably in the next month or so. We have the head of M and A, the president of M and A, he's also starting to hire two associates under him. So we're building that team even before the deal closes because we know it's so core to the strategy of that business and we want to be able to go fast in those cases. We're building that team for us. We have a ton of talent programs so we hire just awesome individuals and then later figure out where they're going to go.

Keep them on payroll until you figure.

Out what they keep them here on payroll. So we have a program focused on kind of that head of M and a head capital allocator at our portfolio role where we partner with people we think are exceptional. We then go find them a market and a business, pair them with a CEO and drop them into one of our platforms.

What kind of background are you looking for in that person?

Typically direct investing background. So a number of them come up through banking, have been on the buy side for a period of time, maybe went to business school, maybe we're at a PE firm but want to be a little bit more hands on, operational and entrepreneurial. And this is kind of way to use their deal background. But go be an operator and the exec of one of our platforms.

This is pretty cool. May have to come back and apply for that role for sure. I want to talk about capital structure. I want you to spill some beans here because I want to understand you and fund people put money in your fund and they're in high hopes of getting much more out of that because it's a long term investment. Is there a target hold period that you have?

We underwrite our models to five years to stay disciplined and be able to compare things apples to apples. I'll say our bias is to go longer. So our Fun Life is 12 years. We can have two one year extensions on that. Our bias is when you get the team right, the market right, you've partnered with great businesses. That's really hard to do. It takes a lot of effort and the out year compounding is often some of the most accretive. We will hold businesses much longer when we get those things right.

That's so true. I look at these tech companies especially when you got the whole life cycle like a 20 year span and you're like the first 10 years was nothing. It was the last 10 years that just boom. All the value created. So that makes a lot of sense. What do you think of metrics? A lot of times I hear the three X's where you're trying to drive on that five year model is that like the standard in private equity, Each.

Firm has a slightly different focus for us. What we talk about with our investors is targeting 3x net on our investments and that's what we underwrite too, within the five year period.

Okay, let's play this out. This is where I get free advice out of you. Let's Say Tech Co. US is 50 employees, 10 million ARR. I have identified two targets, each doing 5 million revenue. One is very competitive in nature. The other one is adjacency which I'm like hey, this actually cross sells into our ICP really well. FP and a type of software. And so I come to you and I think I want to put this together at 20 million ARR combined performa and get you to fund that deal. Let's do simple math. Can we just say 10x? I know we're going to negotiate on that based on other factors and we can talk about how that plays out. So that would be like what 20x and I'm asking you for 50 million, 40 million to put in the business so I can get these deals done, have some cash to integrate them and then 10 million of secondaries because I got to go pay some bills. We're modeling this out. But what I want to know is your view because you're looking at this investment scenario and saying, okay, in five years, based on what Kisan's asking for here, which is 200, I guess every pre money, then 240 comes out to be post money and then you need like 700 and some change, you know, to exit out of it. How do you look at that? Because my big question mark is yeah, this will put us at 20. And then in five years, ideally to get that target, I got to get closer to like 75 million.

Yep.

So probably going to need more money if I'm going to buy more companies. We didn't talk about any adding any debt structure to this. Keeping it simple. So yes, there's potential add debt and do maybe one more deal. But that's where I'm a little stuck. It's this could sound great and I get super excited to do it, but now, hey, am I on the hook and really got to push hard organically? How do you help somebody like me think through really closing that gap to deliver the results that you want? So we're aligned.

First off, the majority of what we do is majority positions typically not coming in in an exact situation like this. But to play out, we'll play along for fun. Yeah, to play along, we do use kind of conservative levels of debt on the business. If you have strong organic growth, you could see a world where in, you know, two, three, four years, you are able to leverage cash flows from the business. Depending on the profitability, you are able to leverage kind of the incremental debt capacity you built to do M and A without needing a significant new chunk of equity coming in. So that can be very accretive M and A. The key is to be conservative and appropriate in the leverage level so you're not hamstringing the business from executing on the organic growth and the product initiatives that are compounding the business. And in most of our deals, we're thinking about a mix of organic. How do we supercharge organic? What investments would we make in product or in team to go faster? And we're thinking about the inorganic. And how can this business over time, through cash flow, through capacity, from leverage, go do really accretive M and A?

That's why I get jealous of the service businesses because it's easier for them to do that tech. It's like everybody's losing money and everybody's got high evaluation expectations on top of it.

Exactly.

There is that part. So there's a Component of debt, maybe, I don't know, as much as cash flow, getting invested in to do it, I guess is there that area of thinking through, of oh, if you're going to need more money to go do acquisitions and I guess a little different maybe in your view, is that something you just factor in? Is it looked upon all at once that hey, this is how much capital need we have to do acquisitions for X years and then after that period we'd look at another tranche of equity to put in the business.

So I can't speak for other firms. We are reserving, when we do the initial deal, we're reserving capital knowing that there's probably going to be needs for additional equity funded M and A in the future. So for us, typically in the services side of the business, maybe 10% of your initial equity check is going in on the first deal and the rest is coming in through time with other acquisitions. And then on the software side, probably less than half of your ultimate equity check is going in on the first deal and more is coming on as you do that M and A. So again, it goes back to having that alignment up front. Where it can be a problem is if the strategy was we're not going to do M and A and then five years in, an amazing deal comes along and the private equity firm hasn't reserved for the ability to do that deal. So for us it's getting really clear upfront and sizing that appropriately and then on our end reserving that capital for future years.

That makes sense. It's just all planned ahead of time. But then things could change.

Things do change.

Then you have a board meeting to talk about it.

Something we try to do is reset that plan once a year. So one of our board meetings each year is rethinking the five to seven year vision and rethinking the ultimate exit plan. It doesn't mean that we want to exit the business or anytime soon, but rethinking what that vision is and how things have changed. And we often see businesses get there faster. So maybe we set a five year vision and we hit it in year three or four and that's great. Let's reset a bigger vision and think about what we need to change now to go even bigger.

You mentioned this in house program, which is really intriguing because you'll have CEOs in house ready to go. Are they out looking for deals too?

They are looking for deals with us. What we mean by our in residence programs is we hire a CEO, a CFO, a CPO being people, not product CPO, an M& A leader. They are sitting in this office. So a number of them are right around the corner over there come into the office every day and we staff what we call a pot around them. So a part of our investing team, a part of our sourcing team and that team is only working on that and trying to find a market and a business and start a platform over the next 12 months.

Oh, so they're all working together as a team.

They're working together side by side and we have sourcing professionals and investing professionals helping them, coming with ideas on markets. So it's really collaborative. We want to find something that they're going to be excited about because they're about to vote with their feet for the next year, seven plus years and something that's a fit for their background. So we try to have people who are athletes who can go into multiple industries, but if they come from B2B software, let's go look for something that's B2B software. If they come from route based field services, let's go look at route based field services options. So very collaborative. But they're working hand in hand with us and very much a part of those teams and bring a ton of credibility. So when we go meet with businesses, they want to talk to operators, typically not investors. And that's a huge selling point.

Is there any programs for developing the talent while they're in resident?

Yeah, so we hire experienced folks and then ahead of that we hire a lot out of MBA programs. So these are people with five years experience. We have a path for those folks to be CEOs in training and one day become CEOs. A path for them to be capital allocators and M and A folks. A path for CFOs. And typically they go into our portfolio, study under a seasoned executive. So spend three, five years at a company learning from somebody who we think is exceptional at that and then coming back and doing it again with us as the ultimate CEO or cfo.

So that's interesting. Almost like an apprentice model. Partner them up and get them firsthand exposure.

Exactly. And we have 100 plus of those folks at different roles across our portfolio right now.

That's so interesting. What is the incentive? Yeah, I kind of got different ones. Right. You got folks that are experienced folks are pretty new, not quite proven. But when you do get them set up to tackle an investment thesis, go out and and drive it. What does that look like? If you can share? I don't know if it's standardized in the industry.

And you mean in terms of incentives?

Yeah, because I mean, obviously there's a cash comp. Let's forget about that. That's like market people can go look at any kind of salary reports out there. But for the equity stuff, like what gets them super fired up about working with PE because it seems like all the rage these days.

Y so we structure profits, interest pools. So it's basically a percentage of the profit generated on that investment. We set that up as a pool so they have the same incentive that we have, which is the more profit we generate, the more they make. And I think for a lot of them, once they see the power of M and A done right, the power of integrating really well and being able to grow through acquisitions, they really lean into that model because it can generate really powerful returns.

There's a profit like on the exit.

Yes.

So they got to be in for the whole ride.

Got to be in for the ride.

This is beyond golden handcuffs. These are like titanium.

For us. The team is the number one most important. If there's one thing we have to get right between team, market and business, we pick team every time. They're a huge part of building the platform, of the success of the platform. So it's important for us that they have the same incentive that we have and are in it for the life cycle of this investment.

So you got the management team, incentivize them with profits on the exit. The team that nobody talks about the board, is there like a approach, have you seen to get the right board that's going to be accretive to these.

Investments as much as possible. We'd love to have CEOs who have been there and done that in a related business be board members, board advisors. So we cross pollinate a lot of our platforms. Like you mentioned, we have an H Vac business, we have a roofing business. Both are residential home services businesses. So the team from the H Vac business is on the board of our roofing business. And it's phenomenal because they learned a lot in building their platform. And they can say, man, there's five things that I would have done differently in my first year. Let me just tell you those five things so you don't have to relearn them. We try to cross pollinate that way from an operational perspective and then also having thoughtful deal people who can help think about M and A and think about the acquisition side as well.

So you might have some folks that are really experienced M and A, but the operators get them on the boards of the other companies. What's the operating partner role in the PE firm?

It depends. We don't at Alpine have traditional operating partners. So that's not a big piece of our model. For us, it's more take CEOs that we work with and cross pollinate that way to provide the operational lens and then have people from the Alpine level sitting on the boards of our businesses as well.

So really in house type of approach. All right, Hayley, so I got to ask. Not every investment goes picture perfect. I hear about things going sideways pretty often. That's always the fun thing we like to gossip about in our industry. Can you tell me about that? I don't know if you're even comfortable sharing a story about something that went sideways. But just curious, how do you respond to that? What actions do you take? Is there a point where you just write off the investment?

Yeah, it happens. I wish it didn't. We try to do everything we can to avoid it, but things go sideways. Things go differently than planned. Over the past five years, that's become more apparent. We owned a ton of K12 businesses in zero of our underwrites. Did we expect K12 schools across the nation to be shut down for people not to be in person? We have downside cases, but there's always things that are unexpected that come up and happen and you have to adapt and respond. That's why I keep saying team is my number one thing. Because when you have a phenomenal team, they get creative and get scrappy and come with ideas to board meetings about here's five different paths we could go down. None is what we expected to be choosing between. But let's talk about it and let's figure out what we're going to commit to and where we're going to go. And maybe to give an example that's not Covid related, sometimes we also get the market wrong as much as we try up front to underwrite it, to build a pipeline before we close the first deal to have confidence we can scale a business. There have been times we've gotten the shape of a market wrong. And the businesses of scale, by scale I mean a million plus of ebitda. So for a lot of people that's not scale, but the businesses of scale maybe were fewer than we expected. This market has a ton. I'm thinking of one example, a ton of 200, 300, 400k EBITDA businesses. That's very different than what we expected in the underwrite. So a year in, we're sitting down with management. We're looking at the plan saying, where do we go from here? And the answer is we have to build capabilities we don't have today. We can't be doing 2 million EBITDA add ons, which are very different and are full businesses. We need to be able to acquire 200k of EBITDA at a time. And we have to build an integration engine and an M and a team that can do that. And that is very different than what we've built today. So we're going to pivot it. Here's the operational plan, here's the target, here's how we make this happen. And for us, it just comes back to having awesome operators who are going to play through it with you, who are going to be committed to this business for the life cycle of it and find a way to win one way or another.

Number one characteristic, you look for an.

Executive team leader will to win.

How do you do that? How do you test them for their will to win?

A lot of rounds of interviews, a lot of references for people interviewing and understanding their motives and their attributes beyond their experience. Because on paper there's a lot of very qualified people, but really trying to understand the attributes of a person, what motivates them and how that's going to align or not align with what we need to do in the investment.

You say that I'm visualizing the shark tank with apple dangling above it. It's like, all right, you got to get the apple. Show me your will to win. Yeah.

And some personality assessments. We do a deep dive and it goes back to childhood and people's reflections on their childhood and what they learned. And four hours later you come out usually with a pretty good sense of who they are as a human being. And getting the human element right is as important as getting the person who on the resume has the experience.

It's a tough thing. That's a whole other interview we'll have to reserve for another time. I need some advice before we wrap up here. I'm not quite doing a majority, so we might not talk this time, but for somebody that's thinking to do a minority recap. I'm trying to basically sell our business that platform. I was under the impression I'd try to go stack 20, which would be good. But it sounds like there's some open minded firms out there. And I'm trying to do it based on a combined performer that gives a nice position that you know where capital is getting allocated and it helps you out from valuation. And so forth. But being balanced is a key thing I'm learning. If you get too greedy in the front end like the 21 valuations, you're going to pay for it later. And I know there's like a lot of companies just riding the AI wave and they're putting all that and getting a high valuation and it's like no, I understand. You want to be really reasonable so that you can be aligned and work together to achieve end goal. Based on that current thinking, what advice do you have for me? Just to say approach leaders like you and the investment side of working together and just making sure I'm heading down the right direction.

Your part about stacking to the 20 and having thoughts on M and A that you would want to do. My biggest advice to founders businesses is get really clear on the playbook. Anybody can do M and A or bring businesses together, but really being able to have a clear vision of what would I do with this business. How could my team or our teams together make this business more valuable, the whole more valuable together than the sum of the parts. And it sounds like for you it's cross sell and getting really thoughtful on why do you think you're going to be successful at cross sell? Is it the same icp? Is your team capable of cross selling? Do you have partnership relationships today that show you can cross sell and further monetize your base? And for us, the businesses that can articulate a really clear playbook for why an add on is worth more to you than others, helps make it a really interesting and unique opportunity and shows up in the valuation as well.

You got a fair point that I should really validate this stuff and even some of the partnerships we have, I feel like we can probably invest more and then be able to leverage that to even validate. Hey, this is why cross sell would work and we could probably validate if it makes sense to acquire those companies.

And finding a partner that is aligned on that vision. And in my career there's been times I've probably been so interested in the deal and it's so easy to oversell or force a partnership that isn't a good fit. And I think over time I've just seen you want to be super clear about what you're looking for, what you want in a partner, what you don't want and there's going to be businesses out there, or for your case, private equity firms who might not be a fit or growth capital firms that aren't a fit and life is too short in finding partners that are really Aligned makes the next five, seven years so much better.

The working relationship, definitely. What's the craziest thing you've seen in M and A?

Seen a lot of crazy things in M and A. Specifically, we did an acquisition in Germany and I learned that. I thought it was a joke, but in Germany, your purchase agreement needs to be read by your legal team before a notary public and it's a 15, 16 hour document to get through. It's just humbling as you work with different countries and in different regions to realize that there's a huge local dynamic of what you do. People are all different, countries are very different. And so that one was just fascinating. This age of AI Reading the purchase agreement before the notary, did you sit.

Through the whole reading?

I did not, but our team did.

Those of you want to learn more about that, I think Frank Temper, one of the attorneys, I believe it was Denton's that was in Germany, actually interviewed him at Dusseldorf and we talked a lot about this. Yeah, you're absolutely right. It is so wild how different countries have different rules around doing M and A day.

Definitely.

Hayley, this has been an awesome conversation. I really appreciate taking the time from doing deals to helping me become a better M and A scientist.

This was super fun. Thank you for coming to our office and we hope to have you back soon.

I am. I'm going to apply for in house residence role here.

Send us your resume.

Anybody still listening here? Fellow M and A scientist? I appreciate you. Thank you so much for listening through. Always welcome feedback. Reach out to me on LinkedIn. Connect with me there. Love to hear what you thought about this interview. If you got any topic ideas, be careful asking for favors. Get too many of those. But until next time, here's to the deal.

Thank you for taking the time to explore the world of MA with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M and a function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email Kisan K I S o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.