When Integration Beats Roll-Ups with Tim Hall

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And A by learning directly from the best. Today I'm joined by Tim Hall, Managing Partner and Founder at Brenton Point Capital Partners, a private equity firm he launched in 2024 after an incredibly successful 20 year run at CI Capital Partners. Tim brings nearly three decades of private equity experience, having started his career at GE Capital back in 1996. Now at Brenton Point, he's already putting that playbook to work with Their first platform investment in Easton Select Group, a pool and spa services company that's actively consolidating the fragmented outdoor living market.

Today we're going to talk all things, rollups, especially integration, because every private equity firm loves to talk about integration. We're going to talk about the independent sponsor model.

Tim, how you doing?

I'm doing great. Thanks for having me.

Hey, thanks for joining me live here in Manhattan, hanging out at VRC's office.

Can we kick things off with a little bit about your background?

So I have been now in the private equity business for 29 years. Seems hard to believe, but started in 1996 out of business school at GE Capital in their equity capital group, which was a very interesting place to sort of learn the trade. It had obviously a great training ground. But one of the unique things about GE Capital's equity investment strategy is they tried to align their investments with one of the 13 industry groups in which GE participated. So what you had there was experts to call from those businesses to understand the dynamics of an industry, specific potential targets, somebody that might be a customer or a supplier of one of the GE businesses. And that always stuck with me where having that sort of expert network, that advisor with you that knows the business from the inside out is something that I've always thought, how do I leverage that? How do I maintain that going forward? And that is something that we have as a universal model in all of our deals. We always view ourselves as the dumb money, if you will. So how do you surround yourself with smart money and have that money align with you in the deal? So those people conduct due diligence with us, they invest with us, they sit on the boards with us. They're advisors, not only to us, but if done well, advisors to the executive teams of the companies. And that's a model that I learned almost 30 years ago. And it's something that we find to be very valuable and something that again, not only helps us be successful, but helps us attract the companies to us. We're bringing more than just money.

We accumulated all this deal experience, worked through the different angles in the private equity ecosystem. Now you're building your own platform and you're giving me some of the uniqueness. But can you maybe explain the model itself because you essentially operate as an independent sponsor.

We do. So an independent sponsor means we identify an opportunity, we identify the experts to bring to that, and we raise capital on a deal by deal basis, each in a specific vehicle. So one of the benefits I like of that is it allows us to be concentrated in a smaller number of deals. Rather than have to do eight or 10 or 12 deals across a fund, I can be significantly invested both with my own capital, but with my time on three or four or five. It also gives us flexibility to own things longer and do things of various stages of development and sizes. So I'll give you an example. We as of this morning completed our third acquisition of a platform. The second one that we did was probably atypical and we did that one in July for what a typical private equity firm will do. So we essentially scratch started the company in the funeral services space. This is a space we find very interesting. It's very stable, it's quite fragmented with over 28,000 independent funeral homes in the US but very difficult to find a platform. Typically when things get even to a couple million dollars of ebitda, they're either bought by another private equity firm who likes a stable cash flow or one of the two large strategic consolidators. So I've looked at the space for a long time, struggled to find a platform of scale in the independent sponsor environment. We were able to scratch start a company. So we hired a CEO who was well known to us. It's the brother of a prior portfolio company executive. He had just done a very successful funeral consolidation platform and we committed personal capital to it. We hired him, we put him on the payroll before we had any operations at all. That was mid January of this year and by July we had closed on four acquisitions, got ourselves to mid single digits of EBITDA and had a robust enough pipeline which today stands at over 40 additional opportunities where we brought on an institutional partner. But starting that kind of ground up business with literally no revenue and no operations would have been something that was challenging to do in my prior funded environment. So we like the flexibility there. We call that an executive first strategy. There's a number of other sectors where we're looking to do the same thing. Homeowners association management has a lot of similar dynamics. Few scaled platforms, high degree of fragmentation. So we're actively looking for an executive to do the exact same play there.

I'm like bursting with questions to ask you. Now. Let's just compare this independent, sometimes known as a fundless sponsor model with the traditional fund model most people are familiar with. Because I think you hit on something where you mentioned you're more focused on fewer investments. I've actually talked to a person that took three REITs public and now they do this model. They don't do that anymore. And I asked and there was a level of inefficiency in the capital allocation because you got to go through that whole fundraising exercise, then you got to call in the funds, then you got to go actually invest it. You go through the whole liquidation, you're sort of got dead weight on the capital going in and going out. And versus now you don't. You just have a direct investment, you got investors directly in it. So as soon as they put their check in, check out, it's like direct correlation to the irr. Am I thinking about it right or am I missing something?

Yeah, I think you are. And there's also some times where people are motivated to do things in the overall fund or fundraising context that may not be the optimal decision for that exact company. The temptation to sell a winner early, to produce a nice IRR in the fund, to be able to go raise the next fund, return some capital to the LPs to have them commit to the next fund. So those are things that we can avoid in this environment. We can be in it for the long term if that makes sense and do what's only right for these investments and particularly in our buy and build model. It takes a while to take that single digit EBITDA company, build the team to go do the M and A to get it successfully integrated, see the return on the investment in that team. So you almost have to have a longer term horizon than you might see a typical 3, 4, 5 year in a funded environment. We generally have a longer term view than that. And if I look over my career, the average hold period was about six years of all of my platforms. If I look at how much of the value was created in the back part of that more than half is created in the last third. Because you build the pipeline of M and A, because you build the team to acquire and integrate all those investments, come up front, you start building your relationships with potential add ons. You might meet a company in year two that you don't acquire till year four, five or six because they've got family issues, succession issues, all sorts of things come up. Somebody's going through a divorce. So it really is a strategy where I think the longer time horizon you have to have that optionality, the better returns you're going to see.

There is a couple things. There's this almost like fun thinking that you eliminate because now you're directly focused on this business and everybody's all invested in around it and just making sure that gets optimized for the performance of the business itself and just overall return on that asset versus a broader portfolio. Play the other part you mentioned.

Oh, just the ability to get the return on the investments that you've made in the team and building the funnel of potential M and A the whole period.

So the whole period you mentioned, you said you typically go for six years and it could be even longer.

Could be longer, yeah.

So there's no like quick flips that you're working on.

There's a fixed timeframe in the SPV documents which we're supposed to try to sell the company. But we've really oriented our LPs to be why not keep compounding our winners longer and they're well oriented. Then the alignment with the personal capital, the significant personal capital I put into each deal really helps people know we're going to make the right long term multiple of capital decision rather than some fund driven decision.

Okay, so if you were to take me kid from the street and teach me how to create an independent sponsor, how do I do that? It sounds like first I need people like you obviously got a big network. When you found an opportunity you knew the executive you need to put in place. Money is going to be the other thing I automatically think of Pipeline. You already mentioned you got 40 targets you're looking at and then probably a strategy somewhere in there. I don't know.

Walk me through this. So look, the network is something that takes a long time to build. So you can't start with that. The money's the commodity. So how can you differentiate yourself? You can develop a thesis around a sector. You can say, hey, this looks like this is highly fragmented. There's a reason for consolidation. Not all industries have that reason. There's a reason should it happen now, what are the benefits of doing that consolidation from a synergy standpoint, does it improve margins? Does it make the business more stable and durable? Better overall customer value proposition? So we spend a lot of time thinking about those types of theses. That's how we came to the funeral home deal. That's how we've come to the pursuit. We haven't yet found our CEO and platform in homeowners association management. But then we actively start trying to identify the pieces which we could build that platform. So we have a buy side search firm helping us in the homeowners association management space. They've reached out to 700 companies on our behalf. They've gotten about two dozen conversations with us. We've had conversations with three or four potential executives for that. So that idea that there's a lot of other people out there with a fund and money. But if you can help put this company together, you're really taking your thesis and building it from the ground up. So then your entry point is not a platform multiple which you then hope to average down through lower priced add ons. You're really starting by building it with the add ons. So that is a strategy we like very much and have done several times before Bretton Point and plan on doing again. That's a place where somebody like yourself who's young and ambitious can start. Because you need an idea, you need some energy, you need to be willing to knock on a bunch of doors and hear a bunch of no's. But for every 20 of those, you.

Get a yes, I like it. And you know that I'm itching for the next thing now since I've stepped out of the active CEO role at Deal Room. So the number one thesis is really have what is that unique thesis and point of view of where the investment opportunity is? Second, build pipeline. And then third is go pitch it, get the money.

Yep. And surround yourselves with talented executives to do that.

And then at the same time, there's.

A lot of very smart people in the private equity business. But it's a very different thing to operate a company from the inside than to observe one as we do from the outside, from the higher strategic level. So find an executive to attach yourself to make them part of the team. Have him help you in due diligence. Give him the opportunity to invest some incentive equity along that those people will pay huge dividends not only in your execution, but if you show up to one of those prospects with an executive by your side, you look different than somebody that just shows up saying, hey, I've never been in this industry, I've got some money. But that's all you have.

Okay. Thesis pipeline, network with executives. So you got operators lined up. Then go pitch and get the money.

Yep. Social traction. Show that it's not just a thesis and a theory, that you've got some targets identified. That's a bit of a juggling game because to get those targets under loi, you've got to show you have the money. To get the money, you've got to show you've got the targets under loi. So that's the one part of the independent sponsor model that's a bit of a balancing act.

We're going to talk about this. So after you get the money, it's go time. You just go execute.

Yep.

Okay. Okay, so let's break this down. Number one, thesis, you do a lot with rollups specifically. Let's talk about that. What makes and you've done it quite a bit even in your previous career. If I recall, it was about 12 platforms and over 200 acquisitions that you've been a part of. And I've seen that a lot.

I've heard it.

Just be honest, Tim, of all these podcasts I've done, if I were to make any bets, it would either be rollup or carva.

Yep.

And carve out is something you got to really learn how to do. But then roll ups too. You got to get the scale.

Yeah. So I guess the one adjustment I make to what you just said is I don't think about them as roll ups. If I think about a rollup, I think about people that 20 years ago would aggregate a bunch of EBITDA, put it under common ownership, some of these structures that were Even these poof IPOs that you would do 20 years ago and hope that is worth more because it's under common ownership of more size. So we really focus on consolidations and integrations, making sure we're building a cohesive company with a cohesive strategy and a cohesive culture and team. That part to me is the most critical part.

Tell me why.

If you start putting multiple different cultures together that don't have the same values towards employees or values towards customers, you're going to have a completely un unified message. You're going to acquire something where you've got churn in one of those either employee churn or customer churn. And then you just paid for something that is a shrinking ice cube or a depleting asset. Our goal really is to find add ons that we can not only acquire at attractive prices, but then drive incremental organic growth. And that incremental organic growth can come from. We're able to reduce costs of a larger entity. We've got a better customer value proposition. We've got additional revenue streams that we can sell to that combined customer base that none of those individual companies can do on their own. Really. If you think about what drives value, it is growth. In almost all of the platforms we do organic growth and then M and A that supports additional organic growth costs are finite. There's only so much capital structure optimization you can do. But growth in most industries is nearly infinite. That's why we really focus on that.

The consolidation play means you're creating a cohesive company, which is why integration is important. This is where that thing that they call synergy comes in. Because you mentioned the culture where you actually Got a cohesive culture which allows you to be able to execute on, saving the costs, be able to cross sell their products and then customer experience, be able to actually improve the customer experience for the broader company.

Yep. Give them better value proposition that can be better service, faster service, more types of services you can provide to them. We find that model quite frequently where an add on will do. If we have three or four main revenue streams, maybe they'll do one or two. They'll do one or two really well. But there's three and four that the combined platform has that we can then go sell into them and they've got a cohesive offering a better service, we've got more revenue and a stickier long term customer.

You got this clear vision on how you're going to be number one in the segment because you're going to get this business. But you see the opportunity consolidating, integrating it and just being the number one business brand that offers best service, best prices, everything.

Yeah, that is the hope that we've thoughtfully planned that all out, made sure that the pieces that we're adding to the platform can help us do all of that. Having done 200 add ons, they don't all go well. But by learning and having process and planning, we've got a very high hit rate. We do make mistakes, we learn from those mistakes. The key thing when you do make a mistake and over 200, you're going to make some is recognize it early, cut your losses early, have backup and contingency plans. The amount of time you can spend trying to fix a bad add on can take you away from four or five or six other good ones. We really try to minimize when they happen, but if they do react quickly, try to fix what you can. If not, put it in the past and move on to the next handful of them.

Backup plan, make sure you have one. This thesis, these are the key elements of building out an investment thesis. Are there any other factors? Is there things you do to validate that thesis or show that it's actually executable? I know we'll talk about the pipeline part, but just.

Yeah. So I talked before about the experience from the GE Expert network making sure we surround ourselves with those people. Day one. We tend not to hire consultants. Consultants are selling a report for revenue. They want you to do the deal. But seeing somebody that's been in the industry for 20 years and maybe they're a retired executive, they don't want to run something anymore. And I talked to three people just like this today. In various industries we're looking at, they still want to be involved, they want to be a board member, they want to be a co investor. So when that person writes a check alongside me in the equity, that's meaningful and says yes, I will be here not just for five or six board meetings a year, but I'm going to spend two, three, four days a month helping this team learn from my experience and grow and develop. That creates a lot of comfort and a lot of alignment. And then secondly as we were talking about came in making sure that the management is fully aligned with us in the equity upside, making sure that they have an equity structure that's very meaningful to them, hopefully life changing that for every 50 cents on the dollar that I make or two to three times on the dollar I make, they make the same amount that they're in it for the long term. And I always view compensation. I want to be fair at market to slightly above market on the annual comp but meaningfully above market on the equity incentive. And just to give you an example of that, if you looked probably across private equity platforms, the most common management incentive equity plan or PIU plan might be 10% of the equity upside. We have historically used a 15% model which is well tested and surveyed to be on the generous side of market time vested only the thinking there would be 15% is 50% more to management than 10 obviously, but it's not 50% less to me. It's a little over 5% less. Instead of owning 90% I own 85% and in many cases almost all I can show you that my 85% with that additional management alignment and motivation will be worth more than if I own 90 of something that likely is worth less down the road.

I actually appreciate it. Earlier, before this interview I was asking for feedback in our situation because I stepped down for the CEO. Now I got a credit equity incentive. When you walked in I was talking to our in house counsel about how do we do it and you mentioned that that you package up pretty heavy and it was interesting that I thought you looked at it as equity for the overall management team and then within that you can build that configuration which in my case was transitioning to CEO. If we look at that, how do you break it down? Is it discretion of the board, the CEO on that allocation and then do you parse out the CEO separately?

Yeah, it is. Obviously the board has a direct negotiation with the CEO and then the CEOs in our cases will typically have, depending on the size of the company, the Stage at which they're coming in 3 to 5% of that 15%. We now know then what's left in that pool. And typically we will not allocate all of that pool. Day one, we'll want to save some in reserve for additional members. We're going to organically hire into the management team as we build it out. And then we often will acquire talented management from acquisitions. We do. So a good example of that in our pool platform, the current CEO of that came from one of the acquisitions. He's the overall CEO of the company and he's got a meaningful equity stake. But we plan that out. Where are we today in terms of our team build out? What does our team need to look like to get us 30 or 40 or 50 of EBITDA? So how do we build that team? How do we allocate some today? Keep enough in reserve so that as that team and that company grows and There are the CEOs, obviously well aligned with you, he wants to attract and build the right team, but knows that they have a finite pool that he can use.

So you keep some of it open so that way they find that talent later, which makes a lot of sense because then you want that to carry through your investment, period. Basically, you don't want to unless there's some meaningful thing where you recapitalize the whole business.

Yeah, we do. We have the view that when we receive liquidity, the management receives liquidity. So if we are able to accomplish our goals early and sell faster than the time vested period, everybody's accelerated. If it takes longer than the time vested period, we typically have a piece of the equity at the tail end that only vests on a liquidity event for us all. So it's complete and perfect alignment through the equity structure.

Is there any interesting ways you find to network with these expert operators like the funeral home? You kind of found some folks, you start reaching out to the execs and.

Yeah, so there's a lot of resources to do that today. Beyond the simple things people can use like LinkedIn, there's the expert networks that you can pay for. The GLGs of the world, there's been a really emergence of recruiting firms that have moved into this model. They will help you source executives. They'll do that for a fee. That fee is typically because they're sort of doing it on spec higher than a typical retained search fee where they're getting a third of first year comp. They'll want something more than that. Some of them will want to put Some equity in alongside of you into the deal. But there's four or five firms that we use that really just show us executives will say hey, we've got a thesis in the homeowners association space and we have two people showing us executives there. We've yet to find that person. Part of it's complicated by a lot of them have non competes so we got to find the right time to pull somebody out of one of those companies. But those are great resources using the network of bankers, of lenders and things like that. One of my most successful deals, a banker introduced me to an executive that had started as a drywall salesman for his father in law's company, became CEO of that sold it to a large strategic, had the entrepreneurial bug and wanted to go start a company again. So I met him in 2010. He had no job and no company. Two years later he got a single branch location up to $2 million of EBITDA. We invested then and we invested in a bit of an unusual way. We put a small amount of money in his pocket. Most of our money went on the balance sheet to provide cash to go pursue the acquisition strategy. Three years later we had acquired nine companies. We got to $58 million of EBITDA and had a very successful exit. But that was an instance where I just asked a bunch of bankers, do you know anybody? I've got a thesis in the space. I need an operator to get started and it took me two years of courting that image to get a deal done.

Wow. So it's such a key element is having that right operator that can really scale and run it. And the recruiters you mentioned that are getting more in the space. I know you mentioned they invest coincide but some of them want part of the comp as a piece of equity or something. I don't know.

Some will ask if they can convert their fee into equity and some will take the fee in cash and then write a check. But it's really in one pocket out the other.

So I was like that's pretty interesting. Maybe I should get into that.

Yeah. Again the nice thing, if they're willing to take their fee and roll it over into equity, they must believe in the individual, they must believe in the story.

Absolutely. That gives you some more confidence. Big piece is getting the right operators, networking from all angles and making sure they're well incentivized in the equity structure. And then building pipeline is the other key element. Sounds like you're doing that even before you had that operator locked up.

We are because we want to make sure it's there. We want to make sure there's actually.

You're actually validating your thesis. Because I know, I'll tell you, this is a side thing. I was trying to do that with the data rooms, but then here I thought, oh, there's a hundred data rooms you can consolidate. We owned a small data room product. It'd be nice to just do a pure cost synergy, kill everything and just migrate the customers over. What I come to find out was actually building pipeline exercise, validated that there was only five real targets. They were terrible. There's something wrong with them. Either extremely high valuation expectation or just terrible operators and in place.

Yeah. So we want to see a broad range of targets because for every 20, 25 companies you engage with, maybe you get a deal done or something like that to do 200 add ons. The portfolio companies that have been involved have probably talked to 2, 3, 4,000 companies to actually get there. So we want to see breadth, we want to test that part of the thesis before we do the deal. So that'll involve making calls, doing surveys, knocking on doors. Sometimes we do that ourselves. Where the companies are relatively easy to identify. Let's say they're licensed, for example, which they are in the funeral business. You can get a list of operators in particular states and you could start making calls. We also will use third parties to do that. Buy site acquisition search firms that have fairly substantial research organizations, many of them have it offshore, they will scrape publicly available information based on criteria we give them. And then we'll have a funneling process where they bring it back and we do a weekly meeting with them and said, okay, we've identified these hundreds. Which ones do you rank A, B and C based on whether they fit your criteria or not? They'll obviously then focus on the A's. They'll make calls, they'll do letter writing campaigns. The goal of that is just get us a conversation with those people.

There's a range of those type of firms. I've noticed there are some that are full end to end and they typically want a percentage or some kicker.

Yes, they typically get a percentage of the deal size in enterprise value with a minimum.

And then there's other firms that do more of just the data aggregation. They either just give you the data or they just set up meetings and then they leave it to you. And then some either just have a monthly retainer and no kicker or in.

Our experience, we've generally liked the firms that are more full service. They typically Charge a fee. That's some kind of sliding scale Lehman type formula where it's a large percentage of the first million, but then it gets down pretty quickly to a point, to two points of the deal. There usually are minimums on those which can create a challenge if you're buying lots of small things. But many of those firms will let you cut those minimums if you do several deals in a year where they're getting enough leverage on the fixed work they did. But that model we tend to find more efficient. And if you can find things on a proprietary basis in a sector where consolidation makes sense, where you're going to have synergies, pay an extra two points to a broker that found you the deal will never make a good deal a bad one.

You do both. You find your own deals and work with the brokers. Are you paying at this stage where you have a thesis? You're validating the thesis by building Pipeline, you're paying for that out of pocket.

Yes, yes. So in the HOA space in particular, we are paying a buy side search firm right now who has not only a success fee but a month of retainer. And we've been doing that for the last four or five months. We hope it'll bear fruit if it doesn't. That's part of the nature of the business. We dig a lot of dry holes and every now and then you find a gusher.

How to pay to play. Yeah, I do like that view of scaling it because I never thought about using a buy side.

No, it helps you leverage our relatively small team. And then one of the things that we've talked about is the early days of the process that changes over time. Once you're in a space, you've got a platform, you've acquired a couple companies, it becomes much easier, people hear about you. In every one of our companies we have a dedicated M and A execution person that helps identify the companies in the funnel, do the diligence, qualify them, get the deal done, and then either go through the integration process or we have a separate individual that will handle the integration component. So that person is full time dedicated to that industry, making contact with people in industry, going to all the specific industry conferences. But what we found, if you do M and A, well, you acquire companies that fit culturally, you acquire them in, you retain the people, you show opportunity to those people. Our best acquisition deal sources are the deals we've already done. They bring along a local competitor or a friend, somebody else they know from the industry association, something like that said, Look, I sold 80% of my company to XYZ Platform. It's been a great experience. Why don't you come talk to us? And that's a huge source of deal. So I mentioned in our funeral platform, we have right now 40 live discussions with potential targets. About half of them come from the first handful of companies we've acquired. They're people they know from the funeral directors meeting or the state board or something like that.

The Sun Tzu quote opportunities multiplies their seeds. Can you help me understand how you size a market? Because when you mentioned consolidation, you're building pipeline and you're looking at it by region or you're looking at by revenue location. How do you size even the funeral home stuff? You can go across America, but it's.

Fairly easy to get national data. When you're getting down to state and local, it obviously becomes much, much harder in most industries where you just can't find level of data. But if you know how many funeral homes are there In Ohio, it's 8 to 900 and you have some idea of the volume that they might do. And you can even get some of that information publicly because most funeral homes post the obituaries on their website. So you track enough of those, you can figure out, yeah, this person did seven calls last week and five the week after that. You can then apply some fairly simple metrics to most businesses. So we know what the price of an average service with a barrel, we know the average price of a service with a cremation. You can come up with some size. What does that market look like? And probably be reasonably close. And then you could do the same for many businesses where if you have a couple of those metrics on the pool service business, if you tell me how many weekly service calls somebody does and what market it's in, where we know the weekly service price based on that customer segment, you can come up with a pretty good approximation of revenue. Or you can do it by looking at the number of trucks they have in the picture on their website. We know roughly what a truck will produce in pool service revenue on a weekly basis. So there's lots of ways to come close.

I notice every industry does that. They find something really obscure that you don't think about. It's not.

But the operators always know exactly because that's how they think about it. If I add a truck, I'm going to spend X dollars on an incremental labor and I'm going to produce three times that in revenue. So the operator is usually no, yeah.

Either Number of trucks, number of chairs in the office, whatever it is. But that's your real.

Those are the unit economics that an operator probably thinks about in their head. And maybe it's not on a big spreadsheet, but that's how the money's made.

Yeah, you can't lie down the numbers. Here's your hard asset. You know how much money you can make on it. Okay, so we start building the pipeline that's looking good. And then when I go out and I go raise money for this. This is kind of interesting too because I feel like some people are really lucky. They come from a private equity ecosystem and they just have friends to call. But what if you're not? You're just me, the kid from the street. Where do I begin to start networking? And really. And to me I feel like it's a relationship and it takes time to build.

It does. Look, obviously it's easier if you have a track record, you have long tenured experience doing this in the private equity space. If you have meaningful personal capital to put into the deal that creates that alignment, that makes it a lot easier for an institution to say, hey, you're putting three, four, five million dollars into this, I'll do some multiple of that. But if you're young and you're starting out, you don't have that, you're going to have to network really hard. You're going to have to be scrappy. You may have to make some sacrifices on the terms to create that alignment where maybe it's a graduated return structure where you don't make that much of the profit if the deal's less than a two or two and a half times multiple of capital. But if you do better than that, you worked it real hard, you showed you're scrappy, then you can get to kind of more normal economics, I'd say for people that are young independent sponsors. The good thing is in the last 10 years, but really in the last five, there's been a huge increase in the amount of interest of investors in independent sponsored deals. They generally like the lower end of the middle market where most of us focus. You can buy single digit EBITDA companies, often outside of an auction. You can put the deal together yourself with a team and a thesis. They don't have to commit to a blind pool fund for 10 years where they're paying a bunch of fees. They can decide whether or not they want to do that deal. It is a lot of work. You're going to get a lot of NO's. We started 18 months ago, we went out to about 60 potential LPs. We've now narrowed that down to a group of five, six, seven people that two of us we've done multiple deals with. They're in each of our platforms or at least two of our platforms. And the remaining. We think there's a high likelihood we can get a deal done with them. They like our investment style, they like the end of the market. They've done a bunch of work on us as a team and know what we're like. So it's going to take you a while to work it. I'd start that process early. There's obviously some conferences you can do to go to that that are specifically independent sponsor focused conferences. We've gone to many of those. Like a lot of things, it's a probability game. Give you an example, we went to the McGuire woods conference last year. There's probably a thousand independent sponsors at that conference. You have 30 meetings, 40 meetings over the course of two days. And a lot of those meetings go nowhere. But we found the investor who's the lead LP in our last deal and one of the two lead LPs from that conference. It does bear fruit. You're in a business where you know you're going to have to have a lot of no's and a lot of swings and misses, but you'll connect every now and then.

It's an independent sponsor model. And also search funds have become extremely popularized. I don't know what they're doing in the MBA programs, but so many of.

Them are coming right now.

I think there's actually an acronym for it that they have. If somebody knows, tell me. I forgot what it's called, but it's basically the Entrepreneur NBA.

Right to a search fund type platform.

Yeah, yeah. Going to MBA to search is like a thing that's called, but it's like a big trend right now because I get them when I was running Guild Room, I get a lot of inbound inquiries and I'm just.

Yeah, it's an interesting model. So that's the blend of the independent sponsor, but somebody that wants to be an operator and actually go. Go run that company.

Yeah, exactly. You're talking about like pretty young. So it's, it's, you know, where a lot of the advice.

Yes, look, I took a much more conservative path out of business school to go work for GE Capital because I frankly needed the paycheck to pay off my loans. But if you have that optionality, you're young, maybe you don't have Family obligations, you're still a single individual and you can afford a swing and a miss. It's a great thing to try.

Okay, so let's break down the difference. For those who may not be familiar, search fund is basically you're going to buy, find, identify business, you raise money, but you're actually going to operate that business and you run it through to an exit return.

The so you're going to do one thing as the sourcer of the deal and the operator for the next three, four, five, six, seven years and then.

As an independent sponsor. Why don't you take that one?

Yeah. You can do that across several platforms. You're not going to run it. You're going to build the thesis, you're going to identify the platforms, you're going to build the executive team to run that for you. And if you're successful, have your hand in several different things at a time rather than be dedicated to one.

Now, how's the business model? Traditional private equity fund is typically a 220 management fee and then 20% of profit share. What's that look like between the other models?

Yeah, so I'd say a key difference is the 20 you mentioned. The carry or the equity participation in my experience is often structured in the independent sponsor world where you earn less than that. Below a 2x, maybe it's 10%. Above a 2x you can earn 20 or in many cases more. If you have higher return hurdles, you hit a three or four times multiple your capital, you can typically see premium carry. The other difference though is you do not get the 2%. That 2% is on the fund's committed capital. So not just on the invested capital. You only get fees typically from the actual underlying portfolio company because you have no investors that have committed to you to charge that 2%.

Interesting.

Most will let you take a deal fee from the company based on a percentage of enterprise value, 1 to 2%. Some take it in cash, some roll it over into the deal. Most will let you take a management fee percentage of ebitda, usually with a floor and a ceiling. And the idea of those is just to keep the lights on, not to make you rich, but not have you worrying about hey, am I going to make ends meet and can I do this for the next four or five or six years? Because that would not be in the LP's interest to have you thinking about something else. But the money really will come 90, 95% of it on the equity piece, not the fee piece. So that's probably the primary difference which Means you've got to have enough of a nest egg to go without comp for a while to invest some money in dead deal expenses, due diligence, expenses on accounting or legal or travel that didn't turn into anything. That is one of the challenges of the independent sponsor model. It's going to take you some financial commitment to do that.

Exactly. And then on a search fund you won't have some of that because it's just directly going in the company, but it goes back to more of the equity incentive. Or is there different is this.

Yeah, you would normally have a very similar equity incentive for putting that deal together and running it. And then you'd have a SAL from that company or something like that.

Got it. So can we. When you talk about getting the money, you talked about some different investors, but what are like the walks of life of different investors that you'll find for your business?

Yeah. So I guess I've found them in a couple of main flavors where we focus for our types of deals. One is I generally like family office investors. They have substantial capital. They have usually a singular objective, which is return on capital, multiple of capital. They typically, if some member of the family is involved or maybe only one generation away, they made their money doing something like this. They made their money being an entrepreneur, starting a business, growing a business, building a business. We've liked those types of investors and then we have other institutional investors, but we've really gravitated towards smaller firms with a dedicated focus on or a significant focus on the independent sponsor model rather than a generalist firm or public money is one that I've just generally avoided. That tends to come state pension funds and things like that have all sorts of other constraints and regulatory issues with it. So we're still refining our model there, but we've got a pretty good stable of relatively small people with a dedicated or significant independent sponsor model and family offices that can write substantial checks.

You've pitched a lot of investors.

I have, yes.

What's it like getting a yes?

It's very gratifying. It never comes usually in one stage. So it's sort of just like your diligence on a deal. It's a progression of. Of signals and signs. How much time are they spending? Are they digging in? What types of questions are they asking? Who is attending the meetings? Who's attending the sessions? Is it the senior folks, the decision makers on the team? I've been fortunate that two of the three investors, actually all three of the investors are well known to other friends of mine. From the business, have invested with them in the past, supported them in their evolution from independent sponsors to many cases a funded sponsor environment. That was very good kind of mutual comfort. The investor being able to do due diligence on me through people that are already invested in and me being able to understand what are they like as an investment partner.

So seeing their interest, they're asking questions. They got some more senior folks attending.

Yeah, I always.

A lot more flirting happens.

I always tell the people the more questions they ask, generally, the better. I feel that means they've done the work, they've read the material, they've been in the data room, they've been through our investment memo. They're trying to figure this out.

You kind of get that inclination that these people are really interested and then how do they deliver the yes? They call you up and be like, we're in again.

It's usually a series of stages because they have to go through their own committee approval process. We'd like to do this. What are the terms? What would my allocation be? Do they need to do the whole deal themselves or are they willing to split it with somebody? In our first and second deal, we essentially had one large institutional investor and then a fairly substantial number of friends and family. These are prior colleagues of mine, executives that work for past portfolio companies, bankers, lenders, things like that. In our last deal, we had two institutions with the idea of, let's broaden our investor base. Instead of having two or three people, let's make sure there's five or six people that want to do deals with us, that we will soon be able to call repeat partners on deals.

How do you frame that? Are you telling people directly, hey, our goal is to get five different investors on this, or is it flipped around? Are they the ones you know, hey, we're interested, maybe.

So it varies. Some of the people that we are talking to, if we're looking for, in the last deal, there was $47 million of equity, could do 3, 10, 15, something like that. They wouldn't fill out the whole deal themselves. There are others that are capable of doing the whole thing and want to do the whole thing. And then in this case, I went to the partner that wanted to do the whole thing. They were our sole institutional investor. And the last one, I said, look, we want to diversify our base. We love you guys. We want to do more deals with you, but it's obviously necessary for us. You're not going to want to do everything with us to have multiple people we can call on to Build that base of five, six, seven people that are really going to be our go to calls. And Instead of calling 60 people in the future, we're going to call 10 and have a high certainty that two or three are going to want to get there.

That's interesting.

I always had this assumption less the better. You got less cooks in the kitchen. And it just streamlines everything bias because bootstrapped the company all the way up. Give me the thinking on why you want to diversify investors.

One is simply because not every deal is going to fit with somebody's investment strategy or experience. Strange things happen. Somebody is on an investment committee that had a bad experience in a similar company or maybe they think it's a similar company and it's not. That gets them to a no. There's a lot of reasons for somebody to say no to an investment. So having some diversity there. But I also think you learn from people's experiences. We treat these LPs as partners. We want to learn from the questions they're asking and the experiences they have. I can guarantee on every diligence call we have through the cycle, they came up with something we didn't think of and we go research it. We diligence and we figure it out. So I really view them as additive. We want them to be engaged. And in many cases there are taking a board seat or a board observer seat. They're there to help us learn from the the 50 other companies they're involved in.

Is there anything you've learned around raising the capital, the board structure that you want to teach me, like on the.

M and A side, picking your partners is really important. So making sure that they are in it with us, they're aligned, they want to be in this long term. They're going to be patient capital. They're going to support us to grow aggressively. They're going to be there if we need them in the eventful rainy day. By the way, we don't ever just leave that to the investor wanting to support the company in the event that something bad happens. And it does. We had the financial crisis, we had Covid. We often always structure our deals so there is callable reserve capital that they have to commit to contractually where we can say, hey, we've got a great growth opportunity or some other global event has happened and we know if we survive this event, we're going to be fine. We want to know we can call capital. And by the way, I have to put in pro rata along with that. That provides them great comfort that I'm putting in a dollar, they're putting in three. So that's something that is in.

Is that typically like a percentage of the total amount?

And that percentage can vary based on how much you think you're going to have. Opportunity to grow at how much equity financing capability you'll need compared to the debt financing capability you'll have. That really is somewhat dependent on starting leverage and starting size. It does vary typically, the reserve, 25 to 33% of the initial check. So a decent amount.

Okay.

In some cases I might like to make that larger. But the LP is going to sit there saying, hey, I don't know if you're actually going to deploy this. I understand having some reserve, but 50% might be too much, but it is good.

That's actually a good thing to have. Then you don't have to scramble around if something happens.

Exactly. It helps when you're talking to the company, when you're saying, I'm an independent sponsor. But once we get this deal done, we do have callable reserve capital. It's also important to our lending partners. They want to know that we've got capital to support the company in good times and bad.

I like that. This is good. I just asked you to teach me something and I learned something totally new.

Hopefully there's something I've learned over 29 years that I can share that's valuable.

The board dynamic. I'm curious about that because at some point I have to do it because I bootstrapped the business, but I eventually want to support an acquisition. Do I strategically start growing the board now? So it's, oh, I give up the one seat, but I already control the other three, or do I just wait till something happens and then structure it?

So I'd encourage you to think about it now. We build our boards primarily as an advisory function, not necessarily a governance function like you might see in a public company. So in all of those situations, we, as Brenton point, control the board. We can appoint and remove people, but we treat those people very much like partners. We do compensate them in cash equity and their investment in the deal. We want them to be engaged. We really want to think about them as advisors to us and to the management teams. Our board meetings are not much about governance at all. They're really strategic growth and value creation discussions. What are the main opportunities ahead of us? What are the main challenges and risks we're seeing today? What do we need to do to put in place team and infrastructure to be successful? How can those board members with their Network and relationships help us. I'll just give you a couple of examples. In our pool deal, the outside board member I had there led a high level big picture strategic discussion after our May board meeting. This is not what's going to happen in the next month or quarter or even years. What's this industry going to look like in five or 10 years and how do we get ourselves ready for that? With people and process and technology that was very useful. There's also a fairly big procurement element to our acquisition synergies. So he's brought in somebody that did procurement for him in a very large company in a chemical manufacturing business. He's doing a part time assignment helping us figure out where we can get some additional purchasing leverage as we grow. So those are the type of value add activities we like to see the board members doing. They're not just sitting there to be a yes or no vote or rubber stamp something they're contributing.

Be strategic, make sure this board is going to be accretive. Do you pay them?

We do, yeah. We pay them typically cash equity out of the profits interest plan and then they invest in the company. I can't think of a situation where we've had a board member that did not invest in the company, did not want to invest in the company because they saw the opportunity they saw. So they get the accretion on that obviously without paying any carry or anything like that.

So what's the range that you would.

Get of board members? Investments?

Yeah.

Either they're not investments, but even their allocated equity that you give them. We did an advisory board for a company and it was a quarter point over four years for an early stage company.

So it was a fairly wide range. Look, the cash is the least significant thing. What is that you say 75,000 to $100,000 a year and that's five board meetings scheduled. Every acquisition has a board call, special topics. Maybe that board member will go help us court an acquisition, assess a new member of the management team we're trying to hire. Something like that. Equity can range from a half a point to two or more, depending on how active they're going to be in helping that company develop. And then their investments have been all over the board. I've had people that do as little as 250 and had one board member who invested 5 million in the company. He was quite happy when we made 5.4 times our money on that deal. That he put a fairly significant chunk of change in his pocket. But he was very value added.

Okay, that makes sense. So you do. If you're going to pay money for them to incentivize them, you want to get the best board members you can find. Okay, so we got the yes. It's here to get the inclination with their interest that they're going to say yes. They say yes, you sign paperwork. And then at this time, do you have deals at loi or is it just purely fundraise? We already have pipeline, but now we're going to go back to those ones that are hot and ready and start, start getting them in loi. Like where are you at with the.

Actual target beyond these three platforms that, that we've done so far? Do we have other opportunities under loi?

I'm just saying, like when you're at that cycle of going to execute on one of these platform plays, like you raise the money.

Yeah. So generally, yes, something under LOI. So the first platform we had an LOI, we had a 60 day exclusivity period to finish our due diligence and raise the capital and the raise money.

Okay.

That's an aggressive timeline for this.

You socialize the thesis.

We socialize the thesis. Before the loi, we've identified investors we think will like it. It Sometime about halfway through there, when we've done enough of our due diligence, we'll deliver our investment memo, which tends to be a 40 to 60 page PowerPoint deck. That explains our angle, how we're going to add value to this. What's the industry look like, why this company, how are we going to execute, what's the market dynamic, what are the targets? Obviously full financial model. And then in the month after that, we're figuring out which investors really want to do this. We're getting them the confirmatory due diligence, whether it's legal or accounting or things like that. So it's. So it's a lot to do in a relatively short period of time. Normally that 60 day process gets extended a little bit. The main reason for that is typically Most companies that are 4, 5, 6 million of EBITDA privately owned, maybe no debt, it just takes them longer to respond to the due diligence request than they expected at the outset. But we can move quickly.

I want to skip over some of those getting a closed steps because we talk about this podcast enough and you can listen to other interviews and get that. What I do want to talk about is integration. You started this podcast with this view that you just can't slap companies together, consolidate revenue. You actually have to build this business and you talk through the thesis of having a real vision of building essentially an empire that has a strong company culture, a strong brand, delivers value to the customers. I want to understand because so much of what I'm realizing is evolving is the integration thinking around these kind of consolidation plates and buyers are actually getting smarter where if they see the smushed together company, they're deeply discounting valuation because they know there's a backlog of integration work to do. So I really want to understand of how do you think through and execute integration?

Yeah, I would say acquiring a company is easy, integrating it is hard. So we focus a lot more on the process around the ladder. It does start with making sure you're buying the right team in the culture. They're going to be your partner in the integration. We're going to affect change at both companies, both the platform and the add on to be able to get it integrated, get to synergy. And that could be everything from procurement. Maybe there's some facility consolidation, there's changes to the management structure. There may or may not be changes to the name of the organization, which sometimes has been around for generations. So you want to make sure you have that alignment going in. How do you get some of that cultural alignment instead of what metrics do they look at? Do they look at things like employee retention and satisfaction, customer value, customer satisfaction, Are those types of things aligned with you? And then a lot of it's just spending a bunch of time with them, making sure we're having several meetings, a lot of facetime, we're walking the facilities with them. I always look at for an executive, how many people do they say hello to? As you walk the floor, you go through the distribution center, how many people do they know by name? Those are good soft indicators of culture that are not on a report somewhere, but they tell you, how is this company run and what's the overall kind of management style.

You can tell when you walk in the office, people are jiving together.

You can tell is the facility clean, is it neat, is it orderly? Do people seem energized? Making sure that that mostly our management team is spending a lot of time doing that. And then it's having a disciplined process. So we start that before we even begin talking to a acquisition target with criteria. What are we looking to buy? And let's make sure we write that down and we stay true to that and we don't vary that. We said we were going to buy companies with these three attributes. We found one with two of those attributes or maybe some different attributes and you go buy it anyway. Right now you're immediately off strategy. So we write them down and in the case of the pool company, they really come in what I'll call sort of of three flavors. For a larger deal, we're going to move into a new region, a new geography. We'll call that sort of a hub. I want to find a substantial, capable, sophisticated management team of a certain minimum size. It has to be something where we say we can add other companies to this and they can handle that and they can help us grow this territory or this region. So finding that then allows you to do one step down from there would be what we may call a spoke. Right. It's a smaller, less capable company. Maybe it's a couple hundred thousand of ebitda, up to maybe a million. It wouldn't be something you'd say, I can double, triple, quadruple this. But it fits into that hub. And the two things are additive. They're additive now because we can take costs out by having one warehouse facility or we have overlapping routes for the pool service business where we can start to say we can make it more efficient, we can service more pools per mile driven. We have savings on procurement of chemicals and supplies and things like that. We have the, the ability to provide employees better career development opportunities. Somebody can go from a pool technician to a regional manager, things like that. And then the last one we'll do are really pure route buys where we're essentially just buying a customer base from somebody who's maybe just tangentially in the pool business. Specific example, we bought a bunch of routes from a guy that delivered heating oil. That's a winter business. He happened to have this small pool business, but wasn't really focused on it, wasn't making a lot of money. When we bought those customers, we retained a very high percentage of them. We put that revenue on our existing cost structure and we had to add some trucks, we had to add some people, but it was right in our existing service area. So we've done several of those. But having those written criteria and to make sure you don't vary from them, and it's not just what does that company look at, how are we going to structure the deal so that hub has to have a substantial amount of rollover equity so we know that person is going to be aligned helping us grow that business. The route buy has no rollover equity. That's our most valuable form of currency. We don't want to give it away if we're not trying to incentivize Management and then the spoke is somewhere in between.

So you got to have both. The culture test is important, the office test, get a good sense of what that's like. But then having a real discipline criteria actually gives you more of something that's tangible in your strategy as well. Because now you laid out here's three different directions we go and why. So once we get that defined, what are the other things that we move into when it comes to executing integration? Because. Yep, I've worked with your team on this, I've talked to a number of them. I love it because you guys almost work like essentially the strategic. There's a lot of upfront planning on how you.

Yep. So to get it from prospect to a closed deal, we have a very standardized process as well. We have protocols. For a deal above a certain size, we're going to use this law firm. Below a certain size, we'll do this one. Above a certain size, we're going to do a full quality of earnings review. Below that we'll do a cash proof with a single individual who does that for us, who knows the pool business. So. So the approach to due diligence changes based on the size of the company. We tend to have relatively standard middle of the road form agreements just to make the negotiation side easy. In the example of those route buys, we literally do those with a bill of sale. There's no merger agreement or purchase agreement. It's two pages and that's about it. We walk away with the assets, which is primarily the customer base and they walk away with some cash. So we try to make that a repeatable process and we track that all in deal rooms for our full team. Can see that as I said in the case of Easton and each company we do have an M and a execution lead. In fact in Easton we have two that you've interacted with that really do not focus on the operations. They are full time deal execution and integration. So they really help coordinate all the resources we need to bring to it. That's the accounting and finance team, hr, marketing, ops, team procurement. All of the things we need to do to make sure we know how we're going to integrate the company day one and that we can start acting on that. Not just day one, frankly a lot of that stuff is happening before we even close the deal. We're thinking about how we're going to optimize the routes or what the infrastructure will look like or what synergies we think we'll be able to get from our vendors on procurement and things like that, but then it really goes day one, where the bulk of the work begins. And this is something where I've used lots of data room products before, up until the time the deal was done, and then they just become a filing cabinet after that. But we use deal room to help us execute the integration. So there's 150 point checklist that covers everything that you can imagine from. We're going to take control of the cash, we're going to convert the payroll, the benefit systems, we're going to change the signage if we do that. But a lot of it's around communication. So some of the key things, day one is how do we take this company that's just gone through an acquisition, they've worked for the last 20 years for the same founder, owner, and how do we give them comfort that it's going to be okay? This is opportunity, this is career advancement opportunity and a broader platform for you. So there's a lot around communication. That's meet and greets, that's town halls, that's written communication. That's our management team telling people and truly having an open door. If you've got questions or concerns, come to me, we're happy to talk about it. We want you to be part of this team. We didn't just buy some trucks and a warehouse, we bought the people out in the field that do the service. So that initial communication goes a long way to comforting people and giving you the time to get things integrated. But the deal room process tracks all of that. It has all of our communications, who's going to send it out, when, who's going to go visit which facility, what are the things we need to do to get the synergies out of the deal? It's across the platform, it's all live. So all of our checklists, all of our templates, all of our forms are loaded up into there. Anybody in the company that's got access to that platform can see what stage are we. We're hitting our timeline in the HR benefit stuff, is it green, yellow, red, who's responsible if we're behind? And that includes the CEO who goes onto the platform and COO and look frequently. Because we've now done, in 16 months, eight acquisitions. There's overlapping integrations going on. So we've got to figure out how to balance the team. And then another great thing it does is it lets us track the synergy realization against our original plan. So are we hitting the numbers that we thought we could on procurement or cost takeout or revenue enhancement opportunity that's a great way to validate our assumptions, refine our assumptions on the next deal. But when we go to sell and we can show the buyer that yes, we can improve EBITDA in the relatively short firm on a cost basis by 25%, primarily through procurement, that really helps somebody understand, okay, now I go buy an add on for five and a half, six times and I increase the EBITDA by 25%. Now I just took a turn and a half or so off the multiple. That is something that will not only create more EBITDA exit, but will create more multiple for our platform to the next buyer. It's a very effective system and again, it's something our team uses. We are using it universally across the three portfolio companies, although the one that we close today is not yet using it, but will be committed to implementing that platform there as well.

Well, what is this deal room thing? I wish I put a disclaimer. You're a customer.

I am a customer. We use it at Brenton Point, we use it at the Easton select pool platform. We use it at our landmark funeral services platform and our company that closed today, not yet announced, we'll be using it as well.

And just to get it straight, you're using it as this platform to run all the deal execution, which is you standardize a process you described and then your integration process has also been standardized. And then you will also use this for collaboration amongst your different teams, like you're supporting your deal leads and then also the function leads that are involved with the integration. And then you also are using this for the seller onboarding, bringing the employees through and making them comfortable with some visibility in the process.

Yeah, helping manage that communication process. And then as I said, when we get there to sell our company our platform, we will use that to validate buyer of the platform's assumptions around the acquisition integration. How far along are we? What are the synergies we've realized? What can they expect to realize going forward in the future?

And then yeah, you got all the synergy tracking right there. So that kind of gives you that full picture story.

I can't tell you how many times we've gone to sell and after doing 30 acquisitions we said, okay, now we got to go add this all up again and try to quantify and dig through years old files and approval decks and things like that.

So you almost have like a portfolio thinking where you can track all that and everything going on. It's pretty cool. I love hearing this stuff.

We're glad we found it actually. The CEO of the company found it found you through a podcast like this that you did and he listened to about scaling through M and A. Yeah.

And disclaimer. It's not a hard push on this, but everybody's got a system that helps support this and I think it's going to be important. With the way AI is evolving and we're just seeing more and more examples of ways to automate diligence.

Yeah. We are interested to see how that can streamline our process. Whether that's contract review or some of the more more mundane or I'll say expensive things that we pay people to do manually. That probably won't be that way in the future.

Absolutely. So all said and done, I'm truly an advocate of just a buyer led process. You should control it like you just gave examples of sourcing deals and then also examples of really front loading the integration. So that goes smooth. Making sure you got the right team from the beginning, from the executives and acquiring, making sure there's a good culture fit. Those are all things buyer led. You're lazy on it. You let a banker book dictate how much you're going to bid, you're probably going to screw those things up.

That's the view. There's well north of a thousand private equity firms. So thinking that you're going to wait for a banker to send you and 50 other people a book and achieve some outsized returns doing that, that's a hard game. So we like to play in places where we have less competition. We have an advantage. We found something on a proprietary basis. We've sold more than just our money. We've brought a team to help us execute on that strategy.

Outside of using the best M and A technology in the world, what are the key things you got to get right? Everybody always refers to the 100 day plan, which I think I'm realizing. You keep stretching things out longer than that, people are just going to have 50. And I'm assuming that's why it's defaulted to the 90, 100 day.

Yeah, it's a big initial push to try to affect some immediate change.

People know there's an end like 100 days.

Yeah. But it affects the trajectory you're on. If you don't do that. If you don't start getting in there and changing the extent you have to. Culture and team and setting goals that can be challenging. Beyond, there's a few other tools we use some executive coaching. Beyond the 100 day plan, there's a one page strategic plan that we like to use. It's a dense page but it captures everything from what are the next months, quarter year goals, five year goals, team culture, what's the big sort of like grand slam vision of what we could become? How do we think about our mission statement, our vision statement? All of that stuff is on there. And again it's dense but what's nice is it is all there on one page. We give it to a wide group of the employees so they know where going and you can sit there and look at it. You could pin it up next to your desk and say, hey, are we aligned? And this is something we use at the board level. But the management team's embraced as well.

So you define that North Star with this one page strategic plan and it's referenceable. That sounds like a really key thing.

The simplicity and the focus of it. You could say there's a hundred things I got to do, but there's usually three, four or five that if you do those it's going to drive a lot of your success.

It's getting the teams aligned on the priorities, good tool platform in place. You obviously got your deal team executed, make sure they found the right deal to begin with. And it sounds like pretty good. I don't know if there's any other gotchas. Ultimately the functions got to deliver as well.

Yeah, it's been a repeatable formula for me where we've typically been able to acquire or own the EBITDA for five to six times. Because we bought relatively small companies, we drove synergies, we drove organic growth. But because we built all that team process infrastructure to allow us to integrate but allow the next owner continue to grow organically, continue to grow through Matt, we've typically sold at 12 to 14 times EBITDA or more. So a doubling of the multiple and that earned arbitrage as I call it, is something that's a pretty durable model. It's really not dependent on cycles of private equity or asset valuations. It's something you can do through all sorts of different business conditions.

We talked a lot about the good stuff which obviously is a lot of hard work that goes into this. I'm curious about the gotchas. Even when you talk about doing this consolidation, scaling, I'm automatically thinking about the obviously a tech guy. I'm thinking about the tech infrastructure and at some point you need to enterprise, ERP system, things like that. Now you got to start consolidating on it. I feel like there's some overhead of integration that can get expensive.

Obviously we all make mistakes. I've certainly made my share of them, figuring out ways to minimize them and mitigate them when they happen. So one, obviously the private equity industry is leverage. We use very modest leverage. The pool business we started with zero leverage. The funeral business we started with zero leverage. We're leveraging those now as we grow capability and size and scale generally. I started in the threes to mid threes times leverage. If you build team and diversity, maybe that goes up into 4, 4 and change. But I've always viewed leverage as something that should enhance the returns, not drive them. If it's driving them, you don't have a good fundamental business driven value creation.

When you say leverage 3 on the.

EBITDA 3 multiple of EBITDA.

We're only thinking revenue these days.

Yeah, yeah, yeah. No, relatively conservative. So that you've got the ability to weather bad times. You've got, you've got plenty of cash from the EBITDA to cover your fixed charges. And I lived through 2008 and nine with a levered building products company. We all lived through Covid. Preserving that optionality coming out the other side will make a huge difference in your overall return. If you get stopped out during that because you didn't have staying power, you get a big negative return. So avoiding that, hiring the best manager team that you can, when you've made a mistake, admit it, get rid of them early. I can't ever think of a situation where I've heard somebody say I terminated that person too early. It's always too late. We do absolutely want to be partners with our management team. And long term we have many repeat partnerships, but they don't all work out. Sometimes people can't scale with the business. Sometimes somebody that's been in a large corporate setting can't come down into a 8, $10 million EBITDA business where they're a jack of all trades and they got to get their hands dirty. Those are some common lessons. And then again, acquiring without integrating is a disaster waiting to happen. Why they're not going to work out. You're not going to be on common systems, you're not going to have a cohesive management team. And once you start having put out multiple fires, a week, month, day, whatever it is, you're not doing anything productive.

Yeah, that's right. I got leverage wisely and then hire fast.

The other people hire really well and pay them above market so you get the best people. But when you've made a mistake, recognize.

Them, act on it. For an early entrepreneur, I've personally struggled with it. And that's a skill to learn, is to be objective and know where and how emotions is influencing your decision making. So they can be objective. Is there anything that you've learned from a deal that may have went sideways or just maybe surprises that pop up during diligence or integration?

To do a deal, you almost need to fall in love with your own deal, which can be dangerous. You need to remain objective, have other people around you to remain objective. But if you go into something with any hair on the back of your neck that's standing up, any sort of significant question, you don't feel like you've done your work, you've thoroughly answered every question and you feel a high degree of conviction. Don't do it, don't do it. That little thing probably is more real than you think. It'll come back and bite you. And as I said, just like with M and A, if I have the chance of my current platform to do 3, 4, 5 deals at any one time and I get one wrong, it's going to keep me from doing multiple other things that are value creating.

I know what you're going to say, but I'm still going to ask this. I find those deals and I don't know if this is me being Indian or raised by immigrant parents, but. But to me, there's a price on everything. And I get that hair raising on the back and I'm just like, all right, maybe I'm not going to pay 20 for this. I'm only going to pay 10. And if they're willing to get a deal at 10, I'll do this deal. I don't know. For some reason I feel like.

So I will do deals with friends where I'm investing a little bit of my own personal money, where I say, hey, if this deal works out, I'm going to make 10 times my money. But there's at least a 25 or 30 or 50% chance I might lose it all. But that's okay because that's a personal investment, doesn't cost me any time. That's more of an expected value type of calculation. But when you can only do four or five things and one of those four or five things not only turns out to be a bad deal in itself, but keeps you spending all your time trying to fix that and not doing two things that are value added, that expected value equation is not what you think it is.

Maybe I got to rethink my investment thesis and focus more on bargain hunting. I grew up learning to negotiate at garage sales when I was 12, 13 years old. So the thing I get stuck on a little bit, you push a little hard to get the good deal and then when you look at the bad deal, you're almost like nobody else wants this.

There's often a reason things are a.

Bargain and you won't do those deals generally. No. Yeah, see that's where I knew you could have.

Look, if you told me I could buy a piece of real estate at a bargain because there was some unusual dislocation and it was made of brick and it wasn't going anywhere, but you're buying a business full of people.

This is the true underlying rule. I did this LinkedIn post about how to negotiate like a Patel and it had all these things. In the last one I was like, but this doesn't apply with people. If I'm buying a TV for you.

We'Re backers of people. The businesses are all execution oriented, service oriented businesses where those people showing up with energy and care about their business and pride every day is what matters. So in a bargain business, people are probably unhappy and they're just breaking that sentiment.

Yeah, they're not going to have a positive sentiment and it's going to be really difficult. I learned that the hard way. I was how old was I? 21. I was doing my first contract gig and I hired these painters and boy, I felt proud about how I negotiated like half of what they're asking. And the next day the job went to the job site. It sure as hell showed that. Tim, this has been great. What's the craziest thing you've seen in M and A?

One of the things that always amazes me is how quickly things can go from unrecognized to very hot. And I'll give you a couple of examples. I invested in a dermatology platform back in 2016. There were a handful of platforms at the time, maybe six or seven. By the time we exited that business, there were 30 private equity backed platforms in the space. So platforms were then trading at higher prices. But. But we all were competing for the same acquisitions or many of the same acquisitions drove up prices of the platform. So I've seen that in so many sectors. If you look at the home services business and you were to take heating, ventilation and air conditioning, pest control, tree care, lawn care, painting, there's dozens of platforms in each of those spaces. We've liked a lot of those spaces but avoided them because the platforms are very expensive. Then the add ons will be more expensive. That is one of the things we really liked about the pool platform, it's Quite large, about $18 billion in total. Very fragmented, very few consolidators, probably 5, 6, 7 right now in the country. Nobody in our geography at this point that we compete directly with. So we very much view this at the earliest innings of that consolidation and trying to find that entry point rather than coming in the seventh and eighth inning when everything's already been bid up. So always amazed me how quickly people will follow the herd, try to find a platform. But if you're the 30th person buying that platform, you're probably not getting the best one.

It's going to be tough. That segment's going to be competitive and it's going to be tough to execute that thesis unless you got a total game changer. Maybe what you're starting to see where they're doing this tech enable service and they're trying to reconsolidate an old industry. What's the most obscure industry you've ever heard of? A consolidation. I was even surprised pool installation got me funeral homes getting pretty obscure.

Funeral homes is one that I find to be very interesting.

I did a diligence on a funeral home years and years ago. A couple of them. Them, they own the real estate, they make profit. You hire a mortician and pay them pretty well. This is a pretty interesting business.

It is an interesting business. It's been consolidating for well over 20 years. There's two large strategics out there that are public companies, but they own about 20% market share. The remaining 80% is either smaller, primarily private equity backed platforms or just massively fragmented 27,000 people that own 1, 2, 3, 4 homes in a region. But it's an interesting business. Our strategies go after rural and secondary markets in Ohio and surrounding states. These companies tend to be fabric of the community. People have gone there for generations. They know people down at the post office, at the local coffee shop, the diner. So there's real kind of brand value and legacy. We keep the brands in place in the real estate. We generally own the real estate. Yes.

So you get the benefit of the mortgage financing.

Yeah, you can finance the real estate at very attractive prices. There are people that have done a sale leaseback model in the funeral home space that is not one we like. They generally have pretty high operating leverage anyway which is based on utilization or calls as they call it in the industry. So if you put that additional fixed rent of the sale leaseback into it, you've created a much more leveraged operating environment before you've even put any debt on the company. So we have not wanted to do that Salee SPAC model. It's also much more cumbersome to operate. Let's say you buy five people in a town or a geographic cluster. Most funeral homes aren't busy seven days a week, so there will be an opportunity to improve the utilization of staff of vehicles. But at some point if you have seven homes within a half hour drive, you might not need all seven. If you put them into a set leaseback, you can't close one of them. You can't take that out of the.

I've worked on a number of hospitality and I've done some gas station deals. It was really similar, but it's fascinating to have that real estate attached to it because the financing is so much more in your favor when you can.

Have and the operating flexibility.

Yes. Yeah. So the hard asset element is back in the picture now.

Yeah.

The funeral business is one I've learned a lot about. I'd say there's very unique customs which have been fascinating to learn about based on the ethnicity or the religion of the people that are coming to the home for the service. So that's been very interesting to learn about as well.

So interesting.

The fascinating thing about living here in this country of a $30 trillion economy and $330 million people. The great thing about my job is we get to learn about fascinating people and businesses every day and hopefully be able to take some of those experiences and apply them across our platform.

I learned a lot from this conversation. Tim, thank you for taking time from doing deals to have a conversation with me.

It's been a pleasure. Look, we've enjoyed the relationship and your platform's been great for us. We'll be rolling it out to the company we acquired today very soon.

Love it. Those of you listening fellow M and A scientists would love to get feedback. This is the first interview I'd done with an independent sponsor. Want to hear what you thought of it. I know this is a topic that was actually suggested. Love to hear what questions I missed or could have asked. Give me the criticism. What I could do to get better at this. If you have topic ideas as well, love to hear it. Till next time, here's to the deal.

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