Episode 16 - Tom Gilroy, GKG Risk

So the big question is this, how are entrepreneurs who aren't scaling tech startups or building lifestyle businesses from scratch doing it? How do acquisition entrepreneurs find businesses, buy them, and then create generational wealth while taking on less risk?

Welcome to Surge funded the Entrepreneurship Through Acquisition podcast. I'm here today with Tom Gilroy of GKG Risk. GKG Risk is a risk and insurance advisor really focused on the search fund space. They've been voted New York's number one place to work, the top insurance employer in America, and they have received acknowledgement from the American Heart association as a fit and friendly workplace. So I think maybe good place for us to start would just be for you to tell me a little bit more about what you do at GKG Risk and what services you offer specifically to search fund entrepreneurs.

Yeah, Nick, thanks for having me on. I'm proud to represent the fourth generation at gkg. So we are a family business actively growing the in the tri state area and now across the country as it relates to search funds. We've directly helped searchers on their due diligence as their vetting opportunities once they have a signed loi, as well as helping searchers place and maintain their coverage moving forward once they close the deal.

So at what stage in the process do you typically start working with search funds and what do you offer? Maybe if you could go to a little more detail on why it's important partner with you during the due diligence and I guess further on when operating the business.

Yeah, you know, I think it varies. It can be as early as fundraising where traditional searchers are going through their PPM and they just want to talk about key risks are out there or things that they should warn about. But really I start seriously talking to people once they have a signed loi. You know, if equality of earnings doesn't work, insurance diligence isn't going to matter. So I usually say make sure you're doing that Q of E and you feel good about the deal. Once you have that confidence, that's where we will typically engage people to do a full review of what's existing and make sure there aren't any red flags or gaps before they close on the acquisition.

Why is it important for entrepreneurs, especially search fund entrepreneurs, to work with an insurance partner?

Yeah, it's, you know, everyone knows they have to do due diligence on an acquisition, but insurance due diligence is criminally forgotten for whatever reason. So it's really important because you need to understand what you're buying if you don't know what losses the company has experienced before. How can you know that it's a good business to buy? How do you know the policies are run up to speed? So part of it is just an overall perspective of doing the full diligence to make sure you understand the opportunity. And the other piece is how do you make sure you're not missing something that could cost you and completely blow up your model once close on a deal?

Yeah, I think it's definitely something that search for. Entrepreneurs should start thinking about as soon as they start searching because it has a lot of ramifications during the search phase and beyond once they acquire the company.

Yeah, you know, and most deals are run the right way. So it might be that the seller didn't feel it was important to carry a cyber policy or there were little gaps they have. But we've also seen it where sellers have completely misrated their policies and the cost tripled once an employer closed. So you don't want to be that person that has insurance costs triple. So you know, for a little amount of effort you can make sure you have the things upfront, you know. Additionally, I found that sellers aren't always forthcoming about claims that have happened before in the past. And so when you order these loss run reports and review them, it shows you every claim that was submitted and usually we request a five year period. So I've also seen it where a seller has said, hey, we're safe, we've had no issues. We looked at the loss runs and found that an employee walked through a trap door in the floor and shattered their hip and got a concussion. So we hope we find nothing. But it's one that you certainly don't want to assume as you're doing overall diligence.

Totally. Definitely important knowledge to have if you're going to buy a business. So do you have any other case studies or examples of how it's been really helpful for entrepreneurs to work with you?

Yeah, you know, there's a lot of different scenarios out there. Another one that can come up is on workers compensation where the seller isn't properly reporting their payroll or they're not tagging the class of work for an employee correctly. So that's one that we can see come up. But you know, for the most part I find that sellers have been running fairly safe businesses. They've been under buying insurance, but they've also been, they haven't been reviewing their policies. So they've been doing what I call a sign and bind where their broker just has them out for lunch once a year, they sign the renewal and keep things going. And when you only look at your policies once a year and your business changes, things can get out of whack. So oftentimes we find that there are savings for the buyer going into it when we market the policies and really tell their story. But those savings are netted out by properly investing in policies the seller might not have found. So I would say typically that's the case. But you do get the oddball where you can't believe the losses you're seeing or you can't believe how the policies were rated and put into place.

Definitely seems like working with the right provider is really important here. How's your business model work? If a surgery is writing their BPM up, should they budget for insurance due diligence or what would you recommend?

Yeah, what you find in our industry is there is absolutely work associated with the due diligence. But most of the people in the space aren't looking for a one time fe, they're looking for clients that they can partner with long term. So you know, typically insurance diligence for us could be anywhere from 5 to $15,000 upfront. But we're willing to waive that cost if the buyer is committing to working with us on their program if there's a successful close. So in terms of budgeting, if you're finding the right partner and willing to commit, it doesn't need to be an upfront expense pre acquisition, your, your policies at closing would actually pay the commission to the broker.

So.

So what I say is we're looking for clients that are looking to take over a great business and have a vision of how to take it from there. And they need a partner to work with. So rather than a one time basis, we're really looking for people that want that partner and value the skill set of an insurance advisor.

Right?

Yeah. And it seems like you're definitely in it for the long term. And looking at your website, it seems like you have a 98% retention rate. So definitely.

Yeah. You know, I think what we found is in our industry, it's highly commoditized. There are insurance brokers everywhere. And so, you know, is as we've thought about it and as every searcher looks at a business who wants to be in a highly commoditized area where all that matters is if you know someone and you have the best price. So for us to step out of commoditization and into really differentiating, we went to a proactive insurance model and so what we've said is rather than just show up and bind your renewal every year, we're going to strategically work with you throughout the year. Make sure it's proactive, make sure you're getting the best price, which is in turn going to help the business. So it's just really, for us about differentiating and making sure that we're staying ahead of everybody else. So for some businesses, that may not be important, but if you're a search fund going in, trying to double, triple the business exposure, et cetera, it's going to be really important to work with someone that can keep up with you.

Definitely. I guess switching gears a little bit, I'd like to learn a little bit more about your own business. You've been ranked highly for employee culture, so I was wondering what you would attribute that strong employee culture to. And maybe there are some learnings there that search fund entrepreneurs could employ cultural practices into their businesses.

Yeah, I think the same way that everybody wants to work where they can differentiate with clients, we want to show up and work at a place that you really enjoy going to. And so for us and for my dad, it's been critical to build a strong culture here because ultimately that's going to help us recruit the best people and make it enjoyable to keep going. So, you know, I, I've got a twin brother over at Google. And so we've, we've stolen from some of the perks they have over there. But, you know, we have things like unlimited time off, and we meet quarterly to make sure people are taking the time off so that it is something they actually take versus the trick to take less. You know, we're fully dressed for your day. We were doing that years ago. You know, we have annually, we call it a unique career planner, where we're talking about, what's your vision, where do you want to go, what path can we help you on? So for us, it's just been a material focus of our business and, you know, it's been great to pick up a couple of words to have it recognized externally as well as with our team.

That's awesome. Yeah. Makes me want to come work for you if I don't end up doing the search fund thing, but that's great. And I think what I really liked hearing was the last part about actually taking an interest in the career and what the first ones did.

Yeah. And, you know, for, for all these searchers going in, if you can't win over the team, you're. You're going to be in big Trouble with your overall business. If people don't buy in, how can you have success? So, you know, we're trying to make our team understand that each person truly matters and we want the best for them, whether that's with GKG or somewhere else. But, you know, there's been plenty of things as well. We're, we're an EOS company and we found that that framework has really helped us one, execute the business, but make sure everyone's voice is heard. So, you know, another thing is as we do, a Colby assessment, which is a behavioral test for every employee on their way in, and it's something that's on your name tag. So we're investing in helping people figure out what's their personality and how can they better work with their teammates. So it's not one silver bullet, but it's been a priority for us every single year to keep focusing on.

Yeah, that's really smart. I've heard if you're acquiring a business, you should also maybe do a HR due diligence, where you give these sort of personality tests and so on to the employees, just so you understand things a bit better. Because at the end of the day.

Sometimes it's spot on and sometimes you're amazed at how wrong you were about somebody.

Right? Totally. Yeah. Yeah. It's very helpful to actually understand how people's mind works because it can come across very differently sometimes. Speaking of the insurance industry, should surge funds consider the insurance industry for acquisition targets and what would be indicators of a good acquisition in this industry?

Yeah, I think our industry has been tough because private equity found it over a decade ago and people have been very successful. So multiples have skyrocketed and most times in the search fund model, people are looking for that sleepy business where multiples are lower. So I think a lot of searchers have been priced out of the insurance agency market. But at the same time, there's a tremendous amount of activity in insure tech, in the services that work with agencies. So, you know, if, if there's an opportunity to get in early. Absolutely. The insurance agency side can be a wonderful business. And then there's a lot of businesses around us, especially technology oriented, that search searchers could be taking a look at as well.

How's the changing landscape of the insurance industry with all this innovation with insurer tech affecting gkg? Are you paying attention to that at all? And is it changing the way?

I mean, insurtech is huge and the insurance industry has traditionally been slow. So there's, there's still, people that are faxing in documents to carriers and you know, online bill pay is a revolutionary technology. E signatures are a revolutionary technology. So we're, we're absolutely embracing it because we think we need to, to stay par with everybody else. But you know, I've certainly seen the industry switch from very local, you know, the person, your community or your best friend to more. Do you have the technology to support us? Are you up to speed? Can you get us the best access? So I, I'd say it's shifted from more relationship based to more of that. Again, how can you differentiate between your strategy and the platform that you have? So yeah, if you're not keeping up, you're going to fall behind in this.

Space like many industries like us. But yeah, makes sense. Last time we talked you had the opinion that search fund businesses should not sell to private equity. I was wondering if you could expand on that a little bit and what else?

Yeah, I think what I said was why let somebody else have all the fun? So you know, if you're a search fund and you're planning an exit, you certainly can't, you shouldn't just change your mind on that without talking to your investors. But you know, as we think permanent equity is the sexy term, it's gotten a lot more popular if, if you see a path to increased revenue, increased margin, and you feel you can execute it. My take is why, why let somebody else have that fun? Why let them recognize the value when you have the skill set yourself? So I've certainly talked to a lot of search funds that have gone from, I would say more of a PE three or four year hold and flip model to we're looking at the long term trying to hold this over eight to 10 years and then exit. Because again, if, if you can execute, there's a tremendous amount of additional value that you can capture in that second half where people have sold quicker in the past to, to lock in their return. So private equity is definitely not a bad alternative. I just think for searchers, if you can execute the path, why let somebody else have all the fun?

Totally. Yeah. Holding an asset longer, you'll benefit from the compounding and can be actually more attractive that way. If you're able to do that and keep going. Makes sense. When it comes to exit strategies. If you are going to exit, what are the most important factors the search fund business should consider?

Yeah, you know, when you're exiting a business, I think buyers want something that they can easily take on and grow. So if things have been lingering and you're saying it's going to be somebody else's problem, it's probably going to come out in due diligence. So, you know, I think buyers are looking for all the same things that searchers are as they go to buy a business. Has it been successfully run in the past? Where is the opportunity to keep going? Is the EBITDA sustainable or is the business just bleeding money? So, you know, it's, it's going to be at a larger scale if we're selling up at the next level. But I think buyers are, are looking for again, a profitable, sustainable business that can, has a clear path to continued growth.

Sure, yeah, it makes a lot of sense.

I think the other thing there, and we see this with every searcher, is buyers want businesses that can run on their own or with somebody that they can put in. And so if you as the searcher suddenly become the key person the business can't run without, it's going to make it tough for somebody else to step in.

Right.

I guess a lot of the parameters you're looking for as a searcher you should also apply to when you're actually selling good. I guess. One last question I have is can you provide some practical ways that search fund businesses can manage risk and when it comes to drafting and what are the key elements that should be included in that regard?

Yeah, I think for every searcher on insurance due diligence, the easiest thing you can do is request what policies are in place today in a five year loss run so that you can see what's come up before. If you do nothing else. Those two pieces of review are going to help you tremendously going forward in your business. The other thing I would say is don't be the stereotype of sign and bind or set it and forget it. You know, it's like going to the doctor every year. You should be proactively saying what are the top risks our business is facing and what are the ways that we can either proactively address them and or buy insurance policies that could protect against the downside. So when you come in and you're actively charging on your business, don't forget about insurance. Make sure you have somebody you can trust and make sure you're continually talking about it as you grow.

Very helpful, practical advice. Thanks so much Tom for joining. Also just should be looking more into insurance and how to approach their acquisition with that in mind. So thanks so much for joining. I think this will be a really helpful podcast for a lot of people.

Yeah, absolutely. Happy to help in any way I can and always rooting for anybody that gets into the search fund and has taken a huge bet on themselves.

And how can people find you online?

Yeah, people can find me on searchfunder.com under Tom Gilroy, they can email me at tomgkgrisk and they can also find find us via our website. So I'm sure we'll throw a link in the podcast here and make sure everybody has my info.

Wonderful. Thanks so much.

This episode of Search Funded is brought to you by smbpodcastnetwork.com the network is a collection of podcasts and shows from around the Internet which focus on bringing you interviews with amazing guests who share actionable advice, ideas and information for small and medium sized business owners and entrepreneurs. Visit www.smbpodcastnetwork.com to find more great shows and easily subscribe to be notified of new episodes. It's a great way to discover quality content. If you've discovered us today via the network, then I hope you're enjoying the show and will consider subscribing directly so you never miss any of our great episodes.