In this episode we discuss strategies for buying and growing businesses, how to choose the best sell-side advisors, and actionable insights for all business owners and investors.
Connect with Ben Fraser on LinkedIn https://www.linkedin.com/in/benwfraser/
Connect with Nick McLean on LinkedIn https://www.linkedin.com/in/nickmcleanfpi/
Invest Like a Billionaire podcast is sponsored by Aspen Funds which focuses on macro-driven alternative investments for accredited investors. https://aspenfunds.us/
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Transcription
Introduction: The Importance of Growth Goals
Nick McLean: The greatest predictor of whether a company is going to grow is whether or not they actually have growth as a goal.
Starting with a Conversation
Nick McLean: First, we just start with a conversation. It always starts with a conversation. We’re not just going to show up to the quarterly board meetings and shake hands, and hope to hear everybody say how great we are.
We’re going to build relationships with the companies that we acquire as well as the people that are working for us. For those companies, try to work together to form a stronger team.
Ben Fraser: And how is that different from other firms in your space that are maybe doing it differently than you guys are doing it?
How do you contrast that with maybe other strategies?
Four Pillars’ Unique Approach
Nick McLean: What I would say is at four pillars, we are entrepreneurs. We’re not spreadsheet jockeys. We’re not financial engineers. We are looking at businesses. We are not just looking at the computer screen. We’re getting out there. We’re meeting people. We’re wanting to hear the story because.
We care about our personal story and we care about the personal stories of the entrepreneurs and whose businesses we ultimately try to acquire.
Welcome to the Podcast
Ben Fraser: Hello, Future Billionaires! Welcome back to another episode. Got a really fun episode today.
Interview with Nick McLean
Ben Fraser: I interviewed Nick McLean. He is with Four Pillars Investors and he does private equity. He is a buyer of businesses, and we’ve talked about this a few times in the show in the past from a different angle. We’ve talked about franchises.
We’ve had a broker on to talk about how to maximize the sale of your business. This is an area that I think is really important for people to learn about because this is usually a core holding of Ultra wealthy investors. And there’s a lot of ways you can do this in private equity is a broad term, but Nick, he shares about his approach, how they find businesses, what they look for, how you improve value from an investor.
Like what are the things you want to look for when you’re investing in these types of businesses?
Entrepreneurship Through Acquisition
Ben Fraser: And even before that, he talks about entrepreneurs that want to be entrepreneurs, but don’t want to start something from scratch. How buying businesses is a great way to jump into entrepreneurship very quickly.
Making Your Business Attractive to Private Equity
Ben Fraser: But at the very end, he talks about how to make your business a trend. Attractive to private equity, and a lot of our listeners are business owners, entrepreneurs, and at some point they might wanna sell the business. And so it’s really important to understand one of the things we’ll be thinking about.
He’s written all the ebooks that we link to that you can read, and he shares the most important decision that you’ll make when doing that in looking to sell your business. So you definitely wanna listen to the end to hear what that single most important decision is in that process. So with that. Enjoy this show.
Invest Like a Billionaire Podcast Overview
Ben Fraser: This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you’ll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra wealthy, discuss economics, and interview successful investors.
Welcome back to another episode of the Invest Like a Billionaire podcast. I’m your host.
Nick McLean’s Background and Four Pillars Investors
Ben Fraser: Ben Fraser and today I’ve got a really awesome guest, Nick McLean of Four Pillars Investors, and they’re very excited to have him on the show talking about private equity. So this is a topic that we hit on from time to time.
Obviously you probably heard of real estate, private equity, there’s multiple subsets and private equity and Nick is actually buying businesses. And so this is something that is maybe. A little bit unique or different than a lot of what our investors are doing and investing in, but it’s an area that a lot of sophisticated, billionaire investors, ultra high net worth are investing in.
And a lot of times pretty significant allocations of their portfolio. And so to me, it’s something I always want to highlight whenever we have a qualified guest to speak on it, because it is something that has been a core investment strategy for A lot of big investors for a long time.
So we’re bringing on Nick McLean. I’ve actually met Nick probably we’re trying to figure it out probably almost eight or so years ago. And both here in Kansas city, it’s really fun to come full circle here and have a conversation with them.
The Journey of Acquiring Businesses
Ben Fraser: But Nick, for those that don’t know you are four pillars, give a little background on yourself and what you guys have been doing with your investments.
Nick McLean: I’ll certainly not try to bore your audience with too much background info here, but yeah, just because, they might like to hear the story of an entrepreneur, if you will I’ll go back a little bit, my, I always thought that I was going to work for a fortune 500 company for 20 or 30 years and hopefully rise through the ranks and retire and get the gold watch or get the gold watch and then retire, whichever happens first, but yeah, When I was in grad school, got exposed to private equity, investment banking, really got exposed to companies in the lower middle market.
And even though I wasn’t aware of the term at the time, there’s a term that has been popularized since, which is called entrepreneurship through acquisition. And that’s really the flavor of entrepreneurism that resonates with me, because I’ll be honest with you. I’m not the guy that has an idea for a better mousetrap or a killer app.
But I still consider myself an entrepreneur and where that took me is that I had some of these jobs and I never really had a seat at the table and I knew that if I wanted a seat at the table, I was going to have to build the seat. I was going to have to build the table and that’s really how four pillars investors got launched.
My partner and I decided we wanted to buy two businesses, one for me to run, one for him to run. We bought the first business in 2016. I bought the second in 2017, which my partner ran. He moved from the Kansas City area, where I still am, to Portland and has been running up that ever since. Now back to the first deal that we bought, I ran that for about a year or so and then got introduced to some potential acquisition candidates to potentially perform a roll up if it made sense.
I won’t go into all the myriad reasons why that didn’t happen, but through that process, what I realized is that. Yes, I’m an entrepreneur, but I didn’t just want to run any type of business. I wanted to run a private equity firm. And even though we had already established four pillars, it was at that point we made a shift from buying businesses for myself and my partner to run into more of what’s called an independent sponsor, which is a type of private equity firm that raises capital on a deal by deal basis.
Ben Fraser: Very cool. So I love what you’re saying there because I think a lot of people have an idea of what entrepreneurship means, right? I don’t have to go crazy. Brand new idea and have a big app and go raise 50 million of venture capital. And then eventually go public on the stock market, right?
That’s what’s been glamorized in the media. But what you’re saying is you can actually go and buy a lot of middle market businesses. And there’s some pretty cool options from, leverage standpoint with the SBA program and other programs to Actually become an entrepreneur through acquisitions.
I talk a little bit about that journey and what that really looks like. As you’re walking down that path to be an entrepreneur, but actually buying a business.
Nick McLean: I will tell you, I can’t say that I walked down that path because walking implies. Or you know where you’re going to get or those things really, what I would say is I took a seat on a roller coaster and luckily my belt was fast enough and it didn’t throw me off.
The reason why I say that is just because whenever you’re working on a deal, whether it’s an SMB, small, medium business deal, or even a larger deal, there are thousands of, infinite really number of reasons why deals can fail. Throughout my 10 years of running 4 Pillars, I’ve talked to countless people who’ve told me, Hey, Nick, I’ve been successful in my career or I’m just getting started in my career.
I really want to buy a business. The number that actually end up buying a business is very low. I don’t have stats for my own personal interactions, but I’ve heard it’s something like 10%. And for the right person, that’s going to be persistent. It’s going to be able to handle all the ups and downs, all the uncertainty.
All the, quite frankly, disappointment. It can still be a good option. But I will tell you, it is not for the faint of heart. One, one, one thing I always tell folks about this is my wife used to always ask me about how work is going, how this deal is going, and so on. She says, don’t tell me, don’t tell me about a deal until you’re sitting at the closing table.
I tell you what, she learned about M&A pretty quickly to be able to make a comment like that. I’ll tell you what.
Ben Fraser: That’s so funny. Yeah I’m probably a silver above with my wife. It’s just telling me something significant is going to change, get her bad. And I’ll just be in the dark of mid interim.
But no, that makes a lot of sense. And, from my standpoint. People heard that they busted for a while, but I used to be a commercial lender and did a lot of SBA financing and actually could finance the acquisition of businesses through one of their programs. And it’s pretty neat because most lenders will not lend unless you have hard collateral and there are businesses you can buy that are collateral based, but generally there’s going to be.
An element of goodwill, quote unquote, which is an accounting term for the intangible value of a business that you’re buying. That isn’t necessarily saleable, on a secondary market like real estate is. But the cool thing is a lot of entrepreneurship, and when I was.
Lender, I forget the exact stats, but the percentage of businesses that are, new startups that end up failing in the first year of business and then within the first five years of business are pretty staggering. I forget the exact numbers, but it’s at least two thirds of new business that are starting.
So the risk. Of, it not working out is pretty high. It’s definitely not in your favor, right? It’s worse than 50-50, but through acquisition, you’re buying an established business. Many times, a lot of times, a business where an owner has taken it to where they can take it or it’s become a lifestyle business where they’ve gotten to a certain point where they’re just comfortable with where the cash flow is at.
They got the customer base built out, but they’re only interested in growing it and they’re leaving a lot on the table. Potentially. You now can take an existing proven business model with a prudent client base, acquire it at a pretty good value and then grow it from there. And the risk, from my perspective, goes down a lot, right?
And has that been your experience and others, the ups and downs, entrepreneurship. And you don’t necessarily get a bypass, being a business owner and all that comes along with that. But. From my standpoint, you eliminate a lot of proving the market out, proving the concepts, proving, what the price point is for the service or product and get to that, the next phase of business, which is buying right.
And then building from there.
Nick McLean: I would agree almost 100 percent with everything that you just said there. Sometimes I’ll, being, being in an investment space, sometimes I’ll get people reaching out about startups and whatnot. They’ll say, do you want to invest? And I’ll think to myself, Man, that sounds like a great idea.
And then I say to myself, but Nick you think every single deal you get sounds like a great idea. So I don’t trust myself investing in early stage companies, but with these mature companies, that dynamic that you talked about is not only very common, it’s exactly what we look for. We like situations where there’s an owner.
doesn’t really care about growing the business. They’ve been making 800, 000, a million, two, 3 million a year. And do they really care about taking their earnings from 2 million to 4 million? Heck no. What, at this point in their lives, what they care about is spending time with the grandkids, playing golf, traveling or whatever their interests are.
And the cool part is whenever we, a lot of times, whenever we get in there, we start talking about how we would potentially try to grow, based on the seller’s inputs as well. But once, once we start talking about that, oftentimes it really reignites the passion of the business owner in the business.
They get excited about somebody else that cares about them. Their business at almost or as much as they do. And it’s fun for them because they get to participate in a growth scenario, but all the risk is not on them. They’re not right. They’re not writing a check in order to buy that next piece of equipment, or they’re not putting their entire family’s nest egg on the line in order to pursue a new product line or a new geography or whatever.
That would be us, but again, they get to participate in that. And like I said, it can reignite their passion.
Ben Fraser: Yeah, no, that’s really cool. Talk a little bit, we talked from like the entrepreneur side for people that maybe want to, make that job, make that leap and, do this themselves, but talk a little bit about those that are, from an investor standpoint, what does it look like, when investing in the space, what are the different types of strategies that different groups like yourself and others.
Used to go acquire these businesses and what does that generally look like in there are multiples and the capital structure laid out for us here a little.
Nick McLean: Sure. So let me talk to you a little bit about our model and I’ll use our model to contrast with what some others might do.
Great. So starting at a high level. We’re typically going to buy businesses with at least 3 million, 3 million of EBITDA. Typically, we don’t look at anything much above 15 million of EBITDA. That’s not exactly how the lower middle market is defined, but generally speaking we can, we would consider that to be the lower middle market.
Ben Fraser: And real quick, just for those that don’t know what EBITDA is, can you give us a quick rundown?
Nick McLean: Yeah, sorry. Earnings before interest, taxes, depreciation, and amortization. Now, if you’re a Buffett fan or a Charlie Munger fan they’ve talked about many times and how much they hate it because it’s not a proxy for cashflow.
I completely agree with that. However, it still can be useful whenever you’re trying to compare businesses in different industries.
Ben Fraser: It’s industry standard for how you base the valuation, right?
Nick McLean: Yeah. Yeah. It’s not a proxy for cash flow, but you can use that to see how much cash flow the company is generating.
Independent of capital structure, which is the important part there. So we’re at the lower middle mark, lower end of the middle market. Obviously there are firms that are mid market, small cap, large cap, et cetera, et cetera. Additionally, another classification I would say is industry preference.
We are largely industry agnostic. Being in Kansas city, we see a lot of manufacturing firms. If you look at our portfolio, it’s overweight in manufacturing. Part of that’s because of my background. I have a Industrial engineering degree from the University of Missouri, but also, Ben, you can relate to this in Kansas city.
You can’t walk too far without running into a manufacturing company, right? however You know through some of my experiences working in manufacturing I realized what really was my passion was not necessarily making manufacturers more efficient or more streamlined it was Thinking about what you can do in order to grow the top line by adding equipment, adding people, adding new capabilities, et cetera, et cetera.
And that’s why we have shifted away from a manufacturing focus to really being industry agnostic. Because if you look at so many small businesses, they’ve done a great job of getting to a certain size and scale where they’re stable, they’re healthy, they have potential for growth.
Thanks. But they’re not quite to the level of sophistication of larger companies that have a defined sales and marketing strategy, that have sales and marketing staff, perhaps on board or or at least agency relationships. So we really feel like the companies in the lower middle market are the ones that we can help grow the most because there’s that sales and marketing component that’s missing that we can help fill out.
And that leads naturally to the third area that I’ll talk about and that’s how we are operationally focused and operations doesn’t just mean, in a company like the shop floor or being an employee in the business, it just means that. We’re not just going to show up to the quarterly board meetings and shake hands, and hope to hear everybody say how great we are.
We’re going to build relationships with the companies that we acquire, as well as the people that are working for those companies, and try to work together to form a stronger team. That can help take this business from maybe 20 million of revenue today to 40 or 60 or 80 or who knows what that ceiling would be there.
So there are a lot of different classifications or differences besides within private equity firms, but those three size industry preference and operationally focused or more passive are three of the major ones, I would say.
Ben Fraser: And how is that different from other firms in your space that are maybe doing it differently than you guys are doing it?
How do you contrast that with maybe other strategies?
Nick McLean: Honestly, a big way that I contrast that is, this might sound critical and maybe it is a little bit critical. You can, smack my hand after this, what I would say is, at four pillars we’re entrepreneurs.
We’re not spreadsheet jockeys, we’re not financial engineers. We are looking at businesses. We are not just. Looking At a computer screen, we’re getting out there, we’re shaking hands we’re meeting people and we’re wanting to hear the story because we care about our personal story and we care about the personal stories of the entrepreneurs and the business owners that we work with and the, and whose businesses we ultimately try to acquire, so often I’ve worked with other private equity firms and that the feeling Is that they crunched all the numbers in their spreadsheet and sell C2000 or 2, 567, 000 or whatever that cell reference would be was 5 percent off and they can’t do the deal.
That’s not us at all. If our spreadsheet doesn’t put something out. We’ll talk to the business owner and say, Hey, here are our assumptions about this. What, are we wrong? How can we mitigate this risk if it’s a risk oriented thing? How could we potentially grow a little bit more so that we do meet our growth targets or something along those lines.
Again it’s just really a relationship focus and one that is trying to build a collaborative team, not just a team that’s trying to put together a.
Ben Fraser: Yeah, that makes a lot of sense. And, definitely a lot of different perspectives when it comes to it, right? If it’s just, this spreadsheet jockey is trying to structure you said financial engineering, which we can get that a little bit, because there are ways that if you change the capital structure, you can potentially put it into a different growth mode.
You can potentially increase value with more leverage, et cetera, et cetera. But before we get to that, I’d love to hear, just taking a step back and thinking about, how do you create value? And from my standpoint, we do a lot of real estate. I’ve talked about this a lot, right?
Where every dollar of income that you can, Bring to the bottom line has a multiplicative effect on value, right? And generally real estate trades have much lower multiples, or I would say much higher multiples, much lower cap rates than businesses, but it’s the same concept, right? And these businesses so for example, I’ll know exactly what kind of range of multiples you’re seeing, but.
Maybe you’re buying it somewhere in a three to five x EBITDA multiple. So if a business generates a million dollars, maybe you’re buying that business for three to $5 million. Maybe my number’s a little bit off, you could correct me in a sec. But if you could increase that bottom line to $2 million, all of a sudden you’ve now doubled the value.
And to what you’re saying a minute ago to get, you’re talking about top line growth, but a lot of times if you have the right. Business model and the right, operational structure, cost structure in place, growing that, that revenue, let’s really have existing clients and existing, revenue and reducing products to add to that is rocket science, right?
And if you have a good cost structure in place, You can drop a lot at the bottom line. All of a sudden you’re increasing the value pretty substantially, especially if you add a little bit of leverage to your purchase. So talk a little bit about your perspective on when you’re trying to add value to these businesses.
What’s your, what are you looking for on the front end to identify the best candidates for. That potential growth. And then what are the standard things you’re doing? You mentioned, adding a piece of equipment, adding staff, adding a sales and marketing team. Is it really as simple as that?
Talk a little bit about some of the kind of key things you guys are seeing.
Nick McLean: Absolutely. So first off, in terms of what we look for going in, the first thing we look for is the mindset of the seller and the mindset of the management team. Have they actually been trying to grow or is it more along the lines of sure, we, we want to grow.
Who doesn’t want to grow? That’s a lot different than, yeah, we want to double this business in three years. Here’s our plan, et cetera, et cetera. I’ll be honest with you. I rarely encounter sellers in management teams that have a defined plan to double their business in three years.
A lot of times, if that is their plan, then they’re not going to want to have conversations with folks like me because they’re not ready to sell. But in terms of what I should say is probably not there, what I would say is first we just start with a conversation.
It always starts with a conversation. If the, if we’re talking to Joe, the business owner, Hey, Joe, what, if you were going to grow the business, if you had a little bit larger checkbook that wasn’t coming out of your own personal checking account, how would you try to grow the business?
We talked to some of the others. Members of the management team to the extent that we have access to those folks. From there, it’s really just thinking about all the different levers and strategies that we’ve used, not only in our portfolio companies, but in earlier parts of our career to, to grow companies.
A common process that we go through with our portfolio companies is a strategic planning process. This is not rocket science. I am not trying to say that I’m reinventing the wheel here.
Strategic Planning for Growth
Nick McLean: At all, we do have our own flavor of a strategic planning process that we use but it’s a very, it’s variation of many of those out there and actually done an in depth video on strategic planning, if that would be of interest to anyone, but that’s always a first step because this might sound trite, but oftentimes what we see is that the greatest predictor of whether a company is going to grow Is whether or not they actually have growth as a goal.
I know you’re laughing because that sounds so true, but again, it’s in our experience, it’s true, but taking that a step further, what we often see is that you could ask the management team, let’s say there’s five people, they all say they want to grow. Okay what does growth mean? Okay the first guy, we want to grow EBITDA by 10 percent by the next year.
Next guy says we need to add two more customers by the end of the year. Third person says, I want a triple revenue within the next three weeks. I say that to exaggerate the effect. The point here, though, is that even though growth can be a goal, Growth looks very different to different people, and for that reason, if nothing else, a strategic plan will help align The objectives, the goals, and also the strategies and tactics used to achieve those goals so that everybody’s rolling in the same direction and everybody has an idea of what that goal of growth actually means.
Ben Fraser: Totally makes sense. Yeah it’s funny because it sounds so trite, but it is in practice. A lot of people aren’t doing that, right? What are your goals? And then, what are your actual KPIs to make sure you’re measuring your progress to those goals, right? There can be a big disconnect, not only on what is the goal or on alignment there, but then are we actually doing the right activities to get to those goals, right?
I think that’s, and I’ve not been in that space like with you a lot, but I can imagine, whether these are, Family owned businesses, a few generations working it or it’s an entrepreneur that started a business that had some success, but a lot of what they’ve done.
It’s been relied on their network, their expertise, and the. They don’t have the systems or the processes or the teams or the ability to delegate and create these self perpetuating machines, so to speak, right? It’s more reliant on them, and that’s where you could come in and bring a more strategic approach to help create a strategy that can add real numbers to the bottom line.
Nick McLean: Yeah. A topic we talk about a lot is we try to increase the level of sophistication within the business. That doesn’t mean. That doesn’t mean we think the people that work there aren’t smart and we need new people that are quite unquote smart or whatever. Not at all. It’s just, talking, rephrasing or rewording what you mentioned earlier, a little bit earlier is, sometimes we’ll talk to a business owner and they’ll say how do you handle this?
Sam always handles that. What do you do when Sam’s gone? The week before Sam goes out of town, he’s always really busy, trying to get everything he can do, as much as and then while he’s gone, these other two people can do part of his job. But man, the week before Sam leaves and the week after he gets back, he is, he’s not a happy camper because he is blinking his tail off.
Now adding processes and procedures, it does add a level of bureaucracy, I will admit that, but also it helps prevent that situation where when one employee is gone, the productivity or effectiveness of your organization suffers as a whole. As you try to increase the value of your business, that level of sophistication has to increase, otherwise you’re not going to get more money for your business.
Earlier you talked about, there’s a company making a million dollars in EBITDA. It sells for three times, it’d be worth three million dollars if they grew to two million dollars of EBITDA, it would be worth double that. That’s sometimes true, but it’s actually not always true because another factor at play here is oftentimes if your EBITDA increases over certain thresholds, the multiple will actually increase for that multiple to increase or for you to make a case to support an increase in that multiple.
That’s where the level of sophistication comes in. That’s where numerous other factors come in as well. But let’s just say a few different numbers. If you were at Maybe, I don’t know, if you were at 1. 8 million of EBITDA and you were to grow to 3. 2, I would say that there’s a potential for the value of your business to increase by at least a 1x, maybe as much as a 2x.
So it’s not just the delta in EBITDA it’s that, that multiple arbitrage, if you will, that allows that value to increase even further.
Ben Fraser: Interesting. Yeah, no, that makes a lot of sense. So talk a little bit about how you guys approach an acquisition in a business deal. Are you, there’s different thoughts on this, but are you coming in as minority owners?
Are you coming in as the majority and taking over primary decision making? What’s your view on the hold period? Are you looking to Buy to improve then sell? You’re looking to hold for a long period of time. How are you forming the capital? There’s talk a little bit about, give us an example deal of how it’s structured and what it looks like and what that kind of whole period is.
Nick McLean: Yeah I’ll give you three examples of deals because they’re all a little bit different. The first deal was Southwest Steel Fabrication in Bonner Springs, Kansas, which is a suburb of the Kansas city metro area. My partner and I actually bought that business using an SBA loan. We still own that business.
It’s doing well. That’s the only business that my partner and I own a hundred percent of, and I would expect us to hold that for quite a long time. The second business we purchased was with three different capital groups that are called SBICs, or Small Business Investment Companies. It’s actually another program of the Small Business Administration, which the purpose is to invest in small businesses like this.
The three groups are KBCI out of Kansas City, MidStates Capital out of Kansas City, and then a little bit larger one out of St. Louis called Capital for Business. We closed that deal in 2017. My partner has been running that ever since, and if you would have asked me at the beginning how long we would have held that one, I would have said at least probably 5 to 8 years, probably no more than 12, I mean we’re sitting at 7 now, so I think realistically it’s probably another 4 to 6 years, maybe more, maybe a little bit less. But that’s our perspective there.
Ben Fraser: And what kind of drives that decision? Is that the capital behind it, that’s, making that, helping making that call, or how do you approach that decision?
Nick McLean: Yes, it’s the capital behind that, as well as the board. My partner and I hold two seats on a five person board.
We’re, generally speaking, pretty patient investors. We know how hard it is to find a good business, to get that business acquired. For that reason, we’re not going to be in any big hurry to sell a business. We want to sell a business when it makes sense to sell that business because we feel like we’ve done everything we can to grow it.
We feel like in order to take that next step of growth, we need a capital partner that has a checkbook with another set of zeros, if you will. So for those reasons and more, we tend to be patient investors.
Ben Fraser: Okay. And then what was your third one?
Nick McLean: Yeah, the third one is really, I would say, a more traditional private equity deal.
We purchased that in the first one in 2020 with a bolt on in 2022. Okay. Originally, I would have thought it would have been a three to five year hold period. It might stretch out to maybe six or seven years. And the reason why I would say that is in 2022, I said we made a bolt on transaction.
However, this was a somewhat rare occurrence where the bolt on was actually larger than the platform. So for that reason, we wanted to give the companies a little bit more time to operate. Operating cohesively before we try and transact out of there.
Ben Fraser: Got it. Got it. Very cool. So it’s like you said, it’s varied depending on the deal and the capital sources and are you generally purchasing these with a type of debt?
I know you mentioned the first one you did but the other one’s been all equity with what’s your capital structure and how do you view capital structure and acquisition? What’s your take on that?
Nick McLean: Yeah. We’re almost always going to. Put some amount of debt on the business.
There are some private equity firms that will purchase the business a hundred percent with equity. And then very, a short period after the close, work out a relationship with a senior lender to put some debt on the balance sheet. But generally speaking, whether it’s day one, whether it’s at close or shortly after close, yes, there is going to be some level of leverage on the business.
Yeah, we would like to employ what we would call a healthy level of leverage. That obviously depends on the dynamics of the business, whether it’s a high capex business, whether it’s any level of cyclicality etc. Generally speaking though, we’re not gonna put, we’d probably put at least 1. 5 turns, so 1.5 times EBITDA in terms of leverage. Typically, you’re not going to go above three unless it’s a unique situation.
Ben Fraser: Got it. Got it. Makes sense. And then on the whole period of the exit, are you generally looking to sell to another private equity group, a strategic buyer, or is it different for every business?
Nick McLean: It’s different for every business. What I would tell you is that having worked for a strategic acquirer, I know that the valuation process is totally different from the valuation process for a financial buyer. And if there is, if you as the seller are able to make a case for a very synergistic relationship or a very synergistic transaction, then the multiples could be far higher from a strategic buyer than they would be from a financial buyer.
What I would say is Our goal is always to create a company that is attractive to a wide variety of different buyers, so as to maximize our outcome and give us the options that we would like. However, what I would say is we default to assuming that it will transition to a larger private equity firm, just because we feel like we can create a business that is going to pass all the various, Diligence questions, the various diligence streams that a private equity firm would require.
Then we definitely feel confident we can pass the diligence process for a strategic acquirer.
Ben Fraser: Yeah, that makes sense. Makes sense.
Choosing the Right Sell-Side Advisor
Ben Fraser: I’d like to shift the conversation just a little bit here and the last part to the business owner who is maybe looking to sell private equity, right? So maybe you’re listening to this podcast and, Hey, I’ve been doing this for a while and I actually, I might be more in the boat of looking to exit and sell my business and, I’ve had a great run, but, ready for the next thing or ready to hand it off.
So what does that look like? Because there are certain things that. A seller will want to be thinking about and likely far in advance of a sale to get ready to sell really to maximize value for a sale and to attract the right type of a buyer. So talk from your perspective as someone who is an active buyer And has sold companies as well.
What are some of the keys and the kind of golden nuggets that are important for someone to think about?
Nick McLean: It’s a very good question and a question that could require another 30 minutes of talk time. So I’ll try to be concise here. But really, while you were talking, two main concepts came to mind.
The first is that Private equity is not all the same there. Even though you could read on a firm’s website that they invest in this size company, this industry, this is how we like to work together, et cetera, et cetera. At the end of the day, just like any other company, a private equity firm is made up of people.
And because of that, You’re going to have a vastly different feel, most likely, from one firm to another. For that reason, I would always encourage sellers to get to know various private equity firms, get to know the people there, so that they can start to have an appreciation for what some of those differences might be, to start getting a feel for Maybe whether or not they, they could potentially work with that person at that private equity firm.
The second concept I will tell you, and it’s very relevant for, I think that the sellers that might be listening to this or the business owners that might sell at some point is we talk to a lot of business owners that make a lot of great decisions. They have grown their business, they’ve taken the right risk, they’ve, you pursued the right customers or whatever.
But the decision that they screw up is what sell side advisor to use. Now, I’m not saying, I’m not going to say that it’s a mistake to use a sell side advisor. I’m not going to say you’re better off doing it or you’re better off not doing it. It’s got to be the business owner’s decision. I will tell you that you can definitely have a very successful outcome if you don’t use a sell side advisor.
You can definitely have a very successful outcome if you do use a sell side advisor. The downside, though, is that you can have a bad outcome using either of those as well. And I can’t speak as much to the situations where you’re not using a sell side advisor because, I’m not, I haven’t been in those deals.
However, in terms of using a sell side advisor, I’ve been on calls with lenders or some of our capital sources. I’ve And they’re just asking me, they say, Nick, like this guy, like his business is amazing. Why did he hire that guy or this firm? And I just have to say, I don’t know, because it’s been in these situations where they’re hurting the deal.
They’re causing the deal to potentially fall apart. And we, and it’s really sad almost because all the great that the business owner has done is potentially going to be unraveled by the choice of not necessarily using a sell side advisor or not, but which sell side advisor to use.
Ben Fraser: Wow. That’s really interesting. Yeah. What would you say are the key qualities, from your standpoint on. The other side of the transaction, but having a lot of interaction, obviously, what would you say? Cause that is a big decision, right? You spent all this time, maybe decades building this business, optimizing, trying to get ready to go and sell.
And then you go sell and maybe Your multiple is half of what it could have been. And the time when you capture the most value that you’ve created the past several decades is impacted by a poor decision on who you have represented you and potentially can leave millions or tens of millions on the table.
So what’s the, that’s a big decision. How has just someone approached that?
Nick McLean: First off, what I would tell you is I know we, no one wants to spend 30 minutes on this. So I will plug that ebook that I wrote that really talks about how to make your business more attractive to private equity, from the buyer’s perspective, which perhaps might be a little bit different than.
Then how other people would approach it. And that’s available at my website, four pillars investors. com slash book. But what I would say is the one piece of advice here is, don’t fall for typical sales practices. What I mean by that is oftentimes how a sell side banker will win the deal is they will do two things.
One, they will tell the seller a higher valuation than perhaps the other people that are vying for the business. And two, they will at least act as if they are more confident about achieving that valuation than others. So essentially what they’re going to say is, I can get you more money than anybody else.
And then the seller says how confident are you? A hundred percent confident. All right. Sign me up. Yep. Because who, who doesn’t want a higher number with higher certainty? Everybody does, but nobody can really guarantee that. What’s the actionable advice to try and avoid that?
You’ll look for a sell side advisor that has actually done some research as it relates to businesses in your industries. That has performed transactions, figured out what the, what their typical customer actually transacts for, as opposed to just writing down a number on a piece of paper and it looks really good in terms of what that results in, we have worked with investment banks in the past and we have seen.
Their work product. And sometimes it’s a very comprehensive view of what valuation is, but also it’s a realistic view because it’s based off of comparable transactions. It’s based off of it’s using data from transaction services that actually get this data and know, and there it’s self reporting what those actual multiples are and whatnot.
So definitely a situation where it’s easier said than done and no, no easy answers, but Again, my primary recommendation would be to look for an advisor that is taking a research driven approach to how they would think about, What your business would be worth and who they think would be the most logical buyers.
Ben Fraser: That makes a lot of sense.
Conclusion and Contact Information
Ben Fraser: Nick, this has been really interesting. Thanks for coming on the show and sharing a lot of your insights. And I think that last nugget is super valuable. So we’ll definitely link to the book and the show notes here and just tell people the best way to get a hold of you or your website. So people can go check it out if they want to learn more.
Nick McLean: That’d be great. I appreciate it.
Ben Fraser: All right. Thanks so much.
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