AM&AA Winter Conference 2016 - Sourcing & Executing Deals in Today's Environment

Thank you all for joining us. We— they saved the best for last, clearly, with this panel. So we appreciate you joining us this afternoon. I hope you are all having a very productive conference. We are here to talk about sourcing transactions and getting them across the finish line in a very competitive environment. The AMAA has put together a really great panel of individuals who all operate in different niches in our marketplace, and I'm sure they all have wonderful pearls of wisdom to share with us. That said, we also know that the 5 of us stand between you and some beer at the pitch and pour, so we will try to stay on task and on time and make this very efficient. I will start with letting the panelists introduce themselves because they can each do a much better job than I can.

Kyle?

Sure. Good afternoon. My name is Kyle Madden, and I'm a vice president with a fund based out of Tampa, just down the road, called KLH Capital. We are investing out of a $90 million SBIC fund, and that is our 7th committed fund of capital. We've done about 135 transactions since the mid-'80s, so we've we've certainly built up a level of what I'll call scar tissue to the table. So we focus on recaps. That's all we do. Recapitalizations, owner-operator recaps, management buyouts, family succession plans, but they're all focused around that recap. Our capital base is incredibly flexible. We'll get into further detail there in the panel, but the capital that we're using to invest is coming from all high net worth individuals. And a really limited amount of them. So we have very flexible patient capital. We can hold a business for longer than I think a lot of the institutional funds. So why don't I stop there and hand the torch to Jeff, but happy to be here and look forward to chatting further.

Good afternoon. My name is Jeff DeJesus. I'm a managing partner for a group called Latticework Capital Management. We're Dallas-based. I'm in Chicago. Our third partner is in Denver, so we've got a little Bermuda Triangle going on. We're focused on healthcare-related transactions. We look at the healthcare space as an ecosystem made up of a lot of different service companies, obviously, whether it's healthcare services, pharmaceutical services, but also manufacturers and distributors. We're focused on the lower end of the middle market, which we define as companies with EBITDA of $1 to $15 million, but really our sweet spot is $2 to $8 million of EBITDA. We don't have any minimums for add-ons, but, you know, our philosophy is we're partnering up with entrepreneurs, operating owners, and management teams in the healthcare space.

Marcia?

My name is Marcia Zebly, and I head up business development for OFS Capital. We are a BDC focused solely on lower-middle-market transactions. We invest junior debt and non-controlling equity. We focus primarily on non-sponsored transactions, so we'll partner directly with management as well as with independent sponsors, family offices, and to a lesser degree, some financial sponsors where we have a relationship. We're industry agnostic and write checks of $5 to $20 million in companies generating 2.5 to 10 of EBITDA. In the US.

Good afternoon. My name is Joe Morris. I'm a managing director with Private Capital Research and also a shareholder with GF Data Resources. Private Capital Research, we've been around for about 15 years. I swear I actually had more hair when I started with Private Capital. We are— we're actually not a fund or a mezzanine investor We're a little bit of a unique group in that we do 100% of what we do is buy-side M&A, where we source and originate primarily platform-related transactions for institutional private equity groups and family offices that we also co-invest in as well. We're pretty industry agnostic, driven mostly by the funds and family offices criteria that we work with. Typically $3 to $20 million of EBITDA.

Thanks.

Great. And finally, I'm Kristin Lee. I am with New Spring Capital. We are a multi-strategy private equity firm based outside of Philadelphia. I am actually in Chicago, and I have colleagues in D.C. and Baltimore. Among our 4 strategies, we seek to provide capital solutions to companies in different phases of their life cycle. We have 2 funds focused on earlier-stage growth equity. Minority growth equity investments, companies with at least $5 million of revenue, often still burning cash from an EBITDA perspective, and those two funds are focused in technology and healthcare. We have the Mezzanine Fund, where actually I spend the— that's where I spend my time. We provide $5 to $20 million in debt and equity to more mature businesses, more than $20 million of revenue. Half of what we do is partner with private equity sponsors to facilitate facilitate their transactions, traditional funded sponsors, and the other half of our transactions, we partner with management teams and independent sponsors. And then finally, NewSpring Holdings is our change-of-control buyout strategy, focused on companies typically between $5 to $25 million in revenue in a variety of industries that have strong prospects for growth, either organically or through add-on acquisitions, companies with strong levels of recurring revenue that we can really take those revenues and help them make changes internally to drive to the next level. So just to set the stage for this discussion, as I think everybody in this room knows, it's a very competitive market out there. The number of transactions has continued to increase, although I saw some mixed data from PitchBook this morning, but in general, 2015 was a strong year from a transaction volume perspective, as well as in the outlook for '16 is very strong, driven by baby boomers retiring, private equity firms seeking exits for their deals. That said, although there are a lot of opportunities to put capital to work, there's a lot of capital out there chasing those deals, and the supply-demand characteristics have led to an increase in valuation multiples. This information from GF Data indicates that actually in the 13 years GF Data has been tracking valuation multiples, last quarter demonstrated the highest multiples they had seen to date. Clearly, that begs a question of how capital providers from our side of the table can prudently make investments in this environment, although it's, it's great for all the intermediaries and brokers out there pursuing those deals. So hopefully today we will share some insights on how we can do that. I think to start out, it makes sense to talk about how the various groups up here get the deals in the door to evaluate the initial opportunity. So maybe each of you can talk about your sourcing strategy and how you look to find your investments?

Sure, I can start.

If you want to start, Jeff.

Obviously, sourcing new transactions is the lifeblood of really everybody in this room, and I'm guessing similar to my fellow panelists, we're seeking to develop and enhance our relationships with the investment bankers and brokers out there. For us specifically, given our healthcare focus, We are attending both general and industry-specific conferences. As an example, my two partners were at the JPMorgan Healthcare Conference earlier this week. I'm down here, and I think I got the better end of the draw there. But beyond and supplementing meeting folks at conferences and developing these relationships, since we specialize in healthcare, What we do is we take deep, deep dives into the different themes and trends that we see in the healthcare market and try to develop relationships with operating managers that we could back. So, you know, most of the transactions that we get to the finish line are actually transactions that we have an angle to, and that usually is a result of some operating folks that we could bring to the transaction.

Yeah, I would say our, our sourcing efforts really originate from our database. And let me explain really what I mean by that. We have a database that dates back to the origins of our firm, and we track data very, very closely and where deals come from and from who. So not only do we track the quantity versus quality of the contact, the deal, the organization, the geographic location, the type of profession, and how that deal came in, at the end of every quarter we can take that data and slice and dice it in numerous different metrics and figure out, you know, is our gut right? You know, is where we think that we're getting the most effective deal flow and the highest quality, is that actually correct? So for us that are focused exclusively on recaps, we can get deal flow from wealth managers, accountants, attorneys, advisors, consultants, bankers, brokers, etc. So that really then parlays into, you know, what is the most effective way to do that? And we feel like it is a continual outbound call effort, coming to conferences like these, both to meet new folks as well as just to stay in touch with old friends. And then again, every, every 12 months we get together and figure out, you know, again, is our gut or is our gut feel actually right? You know, does our data mimic what we think is correct? And oftentimes what is the most, I'll say, efficient way to get deal flow in terms of a quantity is not at all the most effective way of getting the highest quality. So there's curveballs thrown in our data, you know, left and right. But we really do, you know, look at our data in terms of, you know, how do we get the most deals done? And that's the key, is right, is how do we get the most deals, but how do we get the most deals that we get done? Because it's much more efficient than just seeing, you know, a lot of low-quality assets for, for us.

Great. Marsha?

So our marketing strategy is comprised of conference attendance, like this event, as well as events hosted by ACG or OPUS or OPAL, as well as trips— we call them marketing trips— where we travel directly to a city and meet with sources of deal flow there. Typically for us, they're going to be lower middle market investment bankers. as well as some co-invest sources, which could be SBIC funds or BDCs, sponsors. And then we'll do a direct— we have a direct phone call effort, kind of like what Kyle was saying, where, you know, on a monthly basis, we have a report that goes out. Everybody, every junior person in our firm is responsible for calling their relationships, you know, making a phone call and keeping in touch with these folks. And then on a yearly basis, we evaluate which conferences were the best, which ones were most fruitful. Frequently, the really big ones are not actually as, as good as the smaller ones, sort of like this, or say if you take the time to go to Cincinnati, for example. So, so we do that, and then we reevaluate on a yearly basis. And frequently, if you just take the time to actually show up in someone's office, you can feel like you have a good relationship with them. And sure enough, just because you're there, they'll say, oh yeah, you know what, I do have a deal for you. So it takes time and money and energy to take those trips, but we think they really are worthwhile.

Do you want me to comment as well? So, uh, just to kind of piggyback a little bit off what Kyle said earlier, is that we maintain a pretty robust database of professional advisors The way that we source our deals, maybe compare and contrast with other buy-side groups, is a little bit different, is that we actually leverage relationships with the professional advisory community that are connected to business owners, most specifically the boutique investment banks, sort of the kind of 2 to 10 person type shops that are from around the country. And we have a pretty healthy database of these contacts that we've built over 15, 20 years that we're interfacing with regularly. I think just to Marcia's point about just going and visiting folks in their offices, I mean, we look at the United States, we break it up into specific geographies and cities that we try to go to 4, 3, 2 times a year. And just being in these folks' offices, reminding them of who we are, what we do, how we do it, I think is just paramount to our success.

That's great. So once you see the opportunity and your messaging to the potential investment opportunity, and Marsha, maybe you can kick us off, how do you seek to differentiate yourself from your competitors besides rate, which is from your perspective, or for Jeff and Kyle, purchase price?

Well, besides the fact that our money is greener than everybody else's, We actually— we try to differentiate ourselves by flexibility, so we're not a one-size-fits-all shop. We don't really go in with a term sheet and then get feedback after the fact. We like to get to know the business and understand the company, management, ownership, and their goals, and then come up with terms after the fact. So that we can help the business grow and achieve liquidity or disbursements to their shareholders. And Meet frequently will have some sort of equity co-invest, and that aligns our goal— that aligns us with management and makes us usually kinder and more flexible than other more traditional lenders.

That's great. Kyle, besides your money being at least as green as Marsha's, from KLH's perspective, how do you message from the equity side of the equation?

Yeah, this is an interesting question. So our— I'll say our pitch hasn't changed in literally over 30 years. We haven't moved upstream at all. We haven't moved downstream. We've always been focused in that 2 to 10 of 2 to 10 of EBITDA range. And I think it's— what's interesting nowadays is there's so many different equity groups even here that you'll ask them or you ask us, you know, what are we interested in seeing? What size? And, you know, so many of us will say 2 to 10 of EBITDA, right? 2 to 10, 2 to 10, 2 to 10, 2 to 10. But even, you know, amongst group from group, everybody has their own DNA within the 2 to 10 of EBITDA that we like versus what we don't like. So, you know, to mimic what Marcia said, we like to sell our capital's flexibility. What I mean by that is, you know, back to the funding base, it's all very patient capital coming from a very limited number of high net worth individuals. So what does that mean as it relates to your deal flow? We've got a company or two in the portfolio now that has upwards of 60 or so percent customer concentration. And these were deals that were fairly broadly marketed, but you know, at the end of the day, that requires— I mean, that, that quality of asset, and frankly that risk, requires a very special capital base. So that is how we're differentiating ourselves. You know, when we get in front of management, it sounds soft, but I think our personality goes a long way. And it's not rare that we walk out of meetings where guys are saying, and, you know, there's something about them that I just feel comfortable with. So I think it's a matter of being able to look at lower middle market companies where they all have their own risks, they all have their own issues, and there's a laundry list of things that our capital base will allow us to stomach and get over. So we look at a lot of these storied assets that everybody talks about, and we're, you know, we're the group that actually does them. You know, we need to diligence them, we can get comfortable with story deals. And, you know, I guess the second piece of that is personality. And, you know, I think we just need to go to the next step of a deal to kind of see how that works. But flexibility and personality, it's great.

And Jeff, I think you would have some unique perspectives as well, given your industry focus.

Yeah, I think, I think to answer the question, our differentiation really starts with our strategy. Unlike Kyle, LatticeWork is a relatively new fund, and it's a combination of 3 principals who have been in the industry over 20 years each, and collectively felt that being a specialist goes a long way as far as competing for transactions. And then the second part is the lower middle market is still the place to be. 2 of my partners who have been in the healthcare space for the last 10 to 15 years their funds continued to grow, and they were looking at companies $20 million of EBITDA and higher, and they had decided that really the lower middle market was the place to be. And, you know, from my perspective, I was a generalist primarily for most of my professional career, and when there was a healthcare transaction that crossed my desk, it was which healthcare-focused fund can we partner up with so that we have a little more expertise within the investor group. You know, collectively, our strategy of specializing in healthcare and doing companies in size of the lower middle market, we think, is our differentiator. You know, we're still competing against the generalist funds, but, you know, again, our strategy is try to bring an edge to the transaction or an angle, and that typically is the relationships that we've built within the healthcare space.

Kyle, have you seen your competitors— I mean, obviously KLH has been around for a long time. How have you seen your competitors respond to the changing marketplace? You seem to stay pretty steady with your knitting.

Yeah, yeah, our approach hasn't changed. I think the biggest change that I've seen, I think particularly within even the last 5 years, has been really two things: the number, the quantity of what we would consider more boutique investment banks, and secondly, the quantity of the independent equity sponsor side of the market, where, you know, historically we just weren't seeing, you know, too many of these guys. And now, you know, and, you know, it first started where a lot of people weren't comfortable working with them, you know, because they would sign up a deal but they wouldn't have capital. Now that model is here to stay, and those guys are, you know, very, very qualified in terms of signing up deals, doing the diligence, bringing their operational expertise, but then coming to us just for capital. So I think that's been probably the largest change that I've seen in the past 5 years, is just the number of guys that are calling with deals that need money for a partner but yet aren't the entrepreneur. Their other deal guys.

Joe, from a buy-side advisor perspective, has— have you changed how you target companies or how you go to market given the dynamics?

I mean, fundamentally, I mean, we continue to push forward and source our deals as we've always done, which is, again, just leverage the relationships that we have. I can tell you that over the last maybe year and a half to 2 years, what we've done is kind of look back to see sort of what deals we pursued that we were attracted to that may have not gotten done for a variety of reasons, sort of deals that have come back around. Unfortunately, not every deal gets closed, right? So, you know, looking back in a certain opportunities and maybe reaching back out to those advisors, say, hey, what happened? Is there an opportunity to revisit? You know, we, from a business standpoint, I mean, PCR and KLH actually had an opportunity like that, that we were pursuing. It was something that came back around. Kyle remembers it well. And, you know, it's a situation where we just kind of stayed close to the advisor and had a chance to, you know, get in there and get another look at it. So I think overall, you know, our approach hasn't changed, but we've maybe looked at different ways of, you know, searching for that diamond in the rough, if you will.

That's great. Marcia, any insights from your— have you— messaging from OFS has perspective or your go-to-market?

You know, we've— we have done the same types of deals since our inception. And so our investment strategy and criteria has not changed with what some people would call this frothy market. We have seen it become more competitive. One interesting thing we've seen is we've— there have been a lot of bigger players, both on the debt and equity side, that have reached downmarket into what we call the lower middle market. And we find that they don't have the patience or desire to really kind of stay committed to these smaller deals that might take more time and energy and some hand-holding. So we've seen some bigger players come down market, and now we're seeing a little bit of an exodus, and we're just sort of staying where we always have been. So, you know, this is, this is where we are and where we're going to stay.

That's great. I mean, it sounds like collectively up here it's finding your niche and sticking with it. So once you've won the transaction or got it— well, once you've found the transaction, winning it, getting it signed up is the next key part of the equation. Maybe Jeff or Marsha, can you— starting with Jeff, can you talk about different deal dynamics, things that you've done to win transactions besides obviously paying the highest price, which most of the brokers in here would prefer you do, but other dynamics that you've focus on?

Sure, sure. So we closed the deal in November in the veterinary clinic space. It was a, a consolidation of 6 clinics here in Florida. Back to, I guess, what I had mentioned before, the vet space is something that we have worked on in previous lives, had a, had a relationship with a couple operating partners, and, and won this transaction, I think, because of about our ability to bring these operating partners not only to the table, but also the size of the company. On a combined basis, this was about a $1.5 million EBITDA company, so we talked a little bit about the size on this panel, and it's true that a lot of groups are coming down, but we think, you know, the $1 to $3 million EBITDA space is still one that has relatively few fewer competitors. For this transaction, given that we were dealing with 6 different entrepreneurs, we financed this transaction all equity and some seller notes. We think that the, the strategy here is, as we build scale, is to eventually use debt, but we thought it was pretty important to, to really finance this all equity because it made the transaction simpler in our conversations with the 6 different clinic owners. you know, as we have seen, you know, entrepreneurs, it's a pretty traumatic experience for them already by selling their business, and introducing the concept of leverage and interest and creditor rights, we thought would be a disservice to this transaction. So, you know, we think using all equity and some form of seller notes was the right way to go for this transaction, and I think the sellers Agreed.

Marsha and I disagree with the idea of using all equity. So, Marsha, from the debt side, what other terms besides obviously rate have you used or been able to be flexible on to get a deal signed up?

So a couple of things that we can do, you know, again, we invest in small growing businesses, and they really, you know, need to be able to use use not only capital from us but their own free cash flow to grow their business. And so we can, for example, write a 5-year term note with a bullet payment at the end and, you know, provide no amortization. So you're no longer kind of weighed down by having to service expensive debt. It's really an opportunity to grow your business and achieve your goals. We also consider ourselves partners. In our investments. So, you know, whether we have an equity stake or not, we come from equity backgrounds. All of our, you know, investment professionals, except for one, have an equity background. And so we consider ourselves active, if not controlling, investors. And, you know, like to be a resource as opposed to an adversary in your business. So those, you know, being flexible on prepayment or amortization can help us out.

And Kyle, I know, I believe KLA uses, unfortunately again for Marcia and I, a lot of seller financing, but also seller rollover, and it keeps them very involved in the business. Is your ability to either get sellers to participate in the rollover or other seller terms changed?

Yeah, that's been an interesting evolution over the years, and What Kristin's referring to is we are— I don't know if Jim Finovich is in here. He's a good intermediary. But he had— there he is. So years ago on a panel, he had mentioned, and it's totally true, that the sellers here that we're dealing with are interested in, you know, how much cash can I get in my pocket? You know, I want to sell my business. I'm not necessarily interested in rolling anything over. How much cash can I get in my pocket? And we've never let that go. And when we do these deals, 9 times out of 10, the entrepreneur has called us back and have said, you know, now that you've given me $10 million, $20 million, $30 million, what do I do with it? Where do I put it? How do I get the type of return now that I've been using— that I've been used to get in this cash flow producing asset? So what we introduced really a number of years ago was an ability for them to participate higher up in the capital structure than equity. So, you know, think about what that does. That limits the amount or lowers the amount of third-party foreclosure risk, right, from, you know, from another group, right? So no longer do we have to raise as much third-party capital. It's an easier covenant package. It limits third-party foreclosure risk, and it allows the seller to reinvest back up, but in a debt security to be able to earn 8, 9, 10% interest on their money. So that's a creative way to be able to go back to them and say, you know, now that I've wired you, well, you have to do it pre-close, obviously. But, you know, if they're interested, they can sit in the capital structure higher than the equity and earn that 8, 9, 10%. Right. So they like it. Now, it does require a certain mentality or situation. It works well for management buyouts. It works well for family succession deals. It doesn't really work well when they're looking to sell 100% of the business, right? Because typically they're selling to diversify their net worth out of the business. So you do have kind of a 50/50 split there. But that's one way that we've differentiated ourselves, you know, within that seller note rollover market, is to say, you know, we have no problems letting you sit there instead of third-party 'Debt at 10% will let you sit there at 10%,' and that frankly just makes it easier for us, and it's less leverage that we have.

So one interjection there. So when a seller asks us what to do with the $10, the $20, the $30 million, we have a fund that they could invest in.

There you go. Have you, in terms of the seller's willingness percent of proceeds rolling over, have you seen any changes in that, or are they— given where you're targeting, that's pretty consistent?

Yeah, I haven't seen any changes.

That's great. No. So, let's— on the execution side of things, and I'm going to pull Joe in here.

I wanted to answer the last question.

Oh, okay, go for it. Please. No, please share your— yeah.

No, I was going to say, just from— you were talking about sort of flexible terms Yeah, differentiation. I think that, you know, from our end, because again, we're— we work for the sponsor, we're not the sponsor, there's kind of two layers of differentiation. One, we have to sort of endear ourselves to the advisors that we're getting deals from, but then it's really left to the buyer that we're bringing into the process to really differentiate themselves to not only be a qualified but capable intangible buyer. Now, if I look back over the history of PCR and most of the deals we've closed, there's always been some element, some intangible that allowed us to win the deal. I mean, even just the deal we closed in December was a merger of two building products companies, and the group that we were brought in and ended up doing the deal happened to have a significant institutional experience in combining entities and merging businesses. So while valuation certainly speaks to getting the deal, I think there's other intangible factors, particularly on deals that we get done where we see that. Another deal that we got done last year, it was a funny situation in that the founders happened to be— went to business school with the guys that ended up doing the doing the software technology diligence on the deal, so it was like an incestual situation. But if it wasn't for PCR, the sponsor wouldn't actually know about the deal that we brought into the mix. So, you know, I think that there's other intangible factors that help.

So I'm curious, once the deal is signed up, given— I mean, you see probably a lot of We do see a lot of different transactions. One thing I have seen from, you know, NewSpring's perspective is timelines shortening. So, when you're talking about all the different intangibles, one factor is how quickly are you going to get this thing closed. In fact, I lost a deal a few months ago because I wouldn't do it in 30 or 45 days. Just, we still need to do our homework. Have you seen timelines shortening in what you've been witnessing?

The deal we got done in December of last year, Sponsored deal. It was, I think it was, the timeline was sort of 60 days from sort of signed LOI to close. I mean, it actually ended up running a bit past that, but that's quick. I mean, that's fast. I mean, there's a lot that goes in, particularly if you're getting, you know, bringing third-party financing, which there was that element on this deal that, you know, the lenders doing their diligence. So, you know, it's hard for me to really say because we're not necessarily impacting that timeline.

But based on what you've seen, though, you've seen them.

I mean, we did a deal earlier in the year that was, you know, was something that was hovering for 24 months. So, I mean, it's, you know, it's really— I think it's deal-specific, really.

How about you? From terms of— has— again, I think there is pressure to shorten the timelines. Has that impacted your diligence process or how you approach deals?

I think the competitive nature of today's market has not affected the timeframe that we're taking to close the deals, because I'm, you know, I mean, we're not going to shorten our diligence process just to get the thing done, as we discussed. So, right. You know, our time to close deals really depends upon the veracity of the seller's numbers. And again, these are all family-held, privately held businesses. So sometimes we go in and we ask for financials and we're, you know, opened up the cupboard and here's a stack of financials. Those deals take, you know, longer than 90 days. Other times, good intermediary, good advisor, everything's, you know, put together, buttoned up in reports. That can be a 60-day close. I think we do spend the most amount of time these days researching the industry. I think the economy right now is in arguably an interesting state, so I think we really need to get sharp on the industry that we're about to invest in. So our average time to close, 60 to 120 days. We'll mimic Joe's comment, took us 13 months to close one. 2 years ago, 3 years ago. And then obviously since we're comfortable in the industry for an add-on, we can do them in 30 to 45 days.

That's interesting. Again, I think we all continue to get pushback from bankers and intermediaries that you're all very wonderful people, that you want to serve your client well, but still giving us time to do our, do our homework and make sure we are making the right investment decision.

Actually, one quick comment. One thing to keep in mind there is, you know, if you're seeing groups submit term sheets or IOIs or LOIs that, you know, particularly for new platforms that are saying, you know, hey, we can do this deal in 30 days, be careful. You know, I think that's a risky move, not because they can't get it done, but you don't want to overpromise to the seller that that deal will get done in 30 days. And again, to get the right deal with the right partner, these deals will take time, as you guys know. And there's really no way of cutting corners around it. So I think when we see these, you know, kind of 30-day term sheets, it's hard to take them seriously.

That's when hanging on the hoop, to Joe's reference of maybe deals that don't work out the first time, hanging on the hoop and hoping they come back makes sense.

Classic example.

So given we've got a great room of brokers and intermediaries here, I thought it would make sense if Jeff or anybody else up here has some thoughts on things that our audience can do to help make the process smoother in getting things across the finish line to make sure we get to closing on their side of the equation.

Yeah, let me start by saying, I mean, working on transactions especially in the size of market that we play in, without a good intermediary is challenging. You know, it's tough. And so we do value what an intermediary brings to the table here. And it's really setting the expectations of the seller, not only from a valuation standpoint, but the process and the time and the questions that folks like us up here will be asking. So, you know, from our standpoint, you know, I think the biggest value-add that an investment banker brings to the table is setting the expectations. And, you know, it's in everybody's best interest to minimize the broken deal, both from intermediary, the seller, and the financial group that's looking to do the deal.

Yeah, I just— real quickly, I think Jeff hit the nail on the head. I mean, Listen, buying a privately held, entrepreneurial-owned, family-owned business, it's tough, man. It's not easy. I don't know why anyone wants to do it, right? But when there's no advisor involved, no intermediary involved, you know, you don't know if the guy is just fishing for valuation. You know, you just don't know. And so what we at PCR are very conscious about without working with that boutique investment bank or intermediary, because it just, in our opinion, really, you have a willing seller. The guy has made a commitment, and even those deals don't get done sometimes, you know? But at least you know that he's committed to doing something.

I would echo that, and my colleague, Kara, will probably be upset with me for this story, but I met a CFO last year at one of the ACG events, and he was mentioning a future capital need. He wasn't quite sure— debt, equity, this and that. And he said, what advice do you have? And I said, quite frankly, my advice is to go get some sort of advisor to help you migrate the waters. And then I said, of course, call me and do the deal with me. But I mean, the role that the intermediaries play is very valuable when you're dealing with these small, privately held businesses. I think we have time quickly before your pitch and pour. Does anybody have any questions? Any questions for our lovely panelists?

Yes, correct.

The question for everybody else in the room was that if you know the industry, is it as easy for you to get to yes as it is to get to no?

Yeah, my short answer would be yes, because first and foremost, you know the right questions to ask. And particularly that helps to educate yourself in proving out, you know, what prior experience or success or failures you've had in that industry. But really it teaches the entrepreneur that you know, you know, kind of sort of what you're talking about and what you know of. And that adds just that much more credibility. So we've, yeah, we've had success in a lot of the same, not necessarily industries, but business models. We do manufacturing, distribution, and service. So when we see a company within one of those business models, we know that playbook that you run in each business model. And it's not that different per industry. So that really dictates what questions we ask versus what we don't ask. And we know what the financials of that business model typically will look like.

I would say that, you know, OFS being industry agnostic, you certainly We would not expect to see that much concentration in our portfolio, but, you know, we've done a couple healthcare services deals, and as you do more, you get familiar, and you not only get— you not only get comfortable yourself more quickly, but when you're speaking with a representative of that transaction, they're just much more interested in talking to you if you've closed a transaction in that space. I can tell you that I like a certain type of business all day long, but if we haven't invested in one, it does not carry nearly as much weight as if you've closed a deal in that space.

Makes a lot of sense. The question was if culture is still the most significant integration challenge post-closing for a transaction.

Yeah, the answer is yes. I mean, I would definitely agree that's the biggest challenge that we all up here face. You know, we could do models and do projections and base case and downside, but you never know exactly how the transition between the seller and the new group that comes in, how that's going to play within the management team. You know, you try to get a sense for that, and, you know, you use some seller financing to help with that, but the culture and the changes associated with a firm coming in definitely is the biggest transition issue that we face.

[Speaker:DAVID] Culture is an interesting thing. I mean, that's, you know, again, I sound like I'm preaching up here about the partnership guy, But we do a lot of diligence prior to even submitting an indication, you know, let alone prior to submitting an LOI about, you know, do— does the management team, you know, have a culture of their own that bodes well with our culture? You know, and typically we're fairly hands-off. You know, we're not getting operationally active. So the actual culture of the business, our promise to them is it doesn't change at all. You know, we're not showing up every day. We're not painting the walls a different color. We're not really forcing change on a business at all. So what we're really looking for are the management teams who kind of already have that plan or the vision. They just need the capital partner and the tools and resources to do that. So we don't, fortunately, knock on wood, we don't really tend to run into issues post-close, but we do pass on a handful of deals every year where we we go out and we visit, and they're either playing tax games or they're buying product from a family-owned business overseas or something like that where it's just a character check, but that's long, long before any sort of closing, and we'll cut bait fast on those.

Makes sense.

I mean, just to edit that, when we bid on a company, going to the management meeting and hearing the management team talk about a business is important, but even more important is having dinner and spending some additional time outside the management team or management meeting setting to get to know who exactly you're buying the company from and, you know, what's really important to those guys after the transaction closes.

Any other questions? Great. Well, thank you again for sharing part of your afternoon with us. We appreciate your time and appreciate AMA giving us the opportunity to have this conversation. We need to have this conversation. We need to have this conversation. We need to have this conversation. We need to have this conversation. We need to have this conversation. We need to have this conversation. We need to have this conversation. We need to have this conversation. We need to have this conversation. We need to have this