Private Equity’s Consolidation Strategy: Keys to Success in Fragmented Markets

[00:00:00] Lloyd Metz: Get ready to peer behind the curtain of the private equity universe with each episode of best but Never final. Hi, I'm Lloyd Metz, joined by Doug McCormick and Sean Mooney. Together we'll navigate the corridors of private equity, revealing the uncommon knowledge, challenges, successes, and lessons that drive the world of private equity and business forward.

[00:00:30] Let's go.

[00:00:36] Sean Mooney: It is great to be back with Lloyd and Doug. Doug and Lloyd. How are you? Pretty good. Hey, Doug. Hey Sean. Good to see you.

[00:00:44] Doug McCormick: Good to see you guys. Yep. Yep. It's good to take a break and see you guys.

[00:00:48] Lloyd Metz: Sean, you're looking pretty rosy and healthy. Have you been outside getting sun or, or something?

[00:00:55] Sean Mooney: I have, so someone named Sean Mooney. It doesn't take a lot of sun to give me any kind of tone, but when it does, it's usually kind of red. So I like the sun. It just doesn't like me. In the meantime, I think we got a really good episode here. You guys ready to jump in?

[00:01:11] Lloyd Metz: Yeah. What are we talking about? Let's do it.

[00:01:13] I'm excited.

[00:01:15] Sean Mooney: So this is gonna be another episode that we kind of started off with you, Lloyd, in the version of what I'm working on now. And so for this one, we put Doug in the hot seat, if you will, and we're gonna ask him about something he's working on now. So Doug, what's one of those things you're working on now?

[00:01:33] Doug McCormick: Yeah, great. So. I'm gonna talk about a business called Lawn Pro Partners, which is a consolidation in the lawn care or lawn treatment space. But a couple things. First of all, so we think we're making tremendous progress, but as you guys know, you measure that progress at the end when you sell it. And so I'll try to be appropriately humble and show some humility along the way here as we navigate the challenges that you always do in scaling.

[00:01:56] And then the second thing is I use the term working on it loosely because I have all colleagues kinds. So they would gimme a hard time if I didn't acknowledge that. It's certainly a team effort.

[00:02:08] Sean Mooney: So this will be in the, you plural.

[00:02:10] Doug McCormick: Yeah, there you go. There you go. Yeah. You got it.

[00:02:13] Sean Mooney: So maybe before we jump in a little bit more, Doug, can you share just a little bit more about like, what exactly does the business do and what are their services and solutions?

[00:02:21] Doug McCormick: So, uh, as I mentioned, it's lawn care or launch treatment. When lawn treatment we're specifically doing things like fertilizer, weed control, aing. That's probably 75 or 80% of the business. And then by definition, anytime you're serving a customer set with those kind of needs, you end up doing stuff around the edges, like outdoor pests.

[00:02:43] So treatment for mosquitoes, flea, tick. We also do tree, and that would be things like tree care disease, plant fertilization.

[00:02:53] Sean Mooney: Those all have a place near and dear to my heart. When I lived in Connecticut, it's a very docile place. There's like one form of maybe weed. There's lots of ticks. But it's very docile, kind of nice place.

[00:03:04] And then you move to Nashville where every form of nature wants to kill you and your yard. I ended up, we brought our very docile treatment mindset to it. Within a year I was replacing the entirety of our yard, and I think they said, you have more than 35 different types of weeds in your yard now. And so I actually have new sod coming in today.

[00:03:22] We haven't fully recovered yet, so that is good business.

[00:03:26] Doug McCormick: It.

[00:03:32] Something people care about a lot to,

[00:03:34] Lloyd Metz: to Sean's point, where is the business located or where does it operate geographically?

[00:03:38] Doug McCormick: We're kind of mostly in the northeast, so our consolidation strategy was try to build a super regional before you go national. And as we looked around, there were some other consolidators in the marketplace.

[00:03:51] We felt like the Northeast offered kind of an Venn diagram around consumer demographics.

[00:04:01] Density of residences. The amount of like growing season is still pretty long in the central part of the states. And then also lack of competition from some of the other consolidators. So like we have a lot of exposure in Ohio, Pennsylvania, probably our most exposure somewhere up into the Massachusetts, New Hampshire, somewhere.

[00:04:29] Lloyd Metz: What was your original thesis? We've talked about investment thesis kind of work in previous episodes. Just curious, what was the original thesis and how did you get interested in it to begin with?

[00:04:41] Doug McCormick: Yeah, a couple things. I think first of all, you just look at kind of market and business model, pretty large market nicely growing, so somewhere in the 15 billion range and growing in terms of like market growth in kind of a high digit, super fragment.

[00:04:59] So we felt like we could run the consolidation play, and importantly we thought actionable. When I mean actionable, it means while there were some consolidators getting good traction, still a lot of white space where you could put together a sizable asset in the innings of consolidation, if you will. If HVACs at the ninth inning, we kind of felt like this was at the second inning.

[00:05:20] So an actionable and interesting overall market backdrop. And then like. To me, business model defined is highly recurring subscription based revenue. You generally like do a year service at the beginning of the year. It's a relatively low ticket item with pretty good customer value in terms of the customer can see it, they see the benefits.

[00:05:45] So I think that generally translates into a nice margin, nice growing business with good customer retention.

[00:05:52] Sean Mooney: How do you address kind of the seasonality? Do you have things that you also offer during the winter?

[00:05:57] Doug McCormick: Honestly, we've looked into other complimentary services where you can kind of level load the workforce.

[00:06:04] In a lot of our geographies, there's a good eight to nine months of treatment season, and so then you got kind of four down months. But you can do training, you give people some time off. There are other models out there, but for the most part we kind of ebb and flow and we, our employee base kind of actually likes, they work hard during the summer months and then the slow time in the winter.

[00:06:26] Seems to be a good fit for a lot of our workforce.

[00:06:29] Lloyd Metz: Again, back to the thesis, how much time did y'all spend vetting what you laid out? Did you just kind of go in with that as a point of view and then you did work to confirm it or test it? Or did you just kind of think about it? You guys huddled and was like, yeah, that all makes sense, and just move forward.

[00:06:48] Just curious how you get out of the starting blocks.

[00:06:55] Doug McCormick: Our competency and experience in other deals, I think is fundamental to our view of do we have an angle in this market? And so we've had some really good success with consolidations, but also consolidations in technical services and markets. So I think that gave us a fair amount of conviction in our ability to effectively evaluate.

[00:07:15] We think success in the market with other competitors is actually a validation of the opportunity and not necessarily a negative assets. That traded in the space in like 22 that we thought validated the consolidation, the quality of the business model, exit opportunities, but still, we still felt like there was enough white space where we could go run the play as well.

[00:07:38] And Lloyd, then I think honestly, we feel like you gotta get out into the market, get some primary research to really validate the thesis, and so I felt like we did all the outside work we could. And then you gotta engage in the marketplace and see if the thesis is.

[00:07:54] Lloyd Metz: And how has it played out? How has your thesis played out and has anything changed since the beginning of when you started to develop the thesis?

[00:08:03] Doug McCormick: So I said early on, um, gonna be humble about like you, until you print the ticket, you don't win.

[00:08:08] But we're having great traction in the space. And so I think we feel like we've been lucky that the businesses we bought in aggregate have grown very nicely over the last two years. We've been in it a little less than two years. Where I think we've outperformed is on the velocity of m and a. We've been able to accomplish, so in about 20, 21 months we've done 16 deals and have two additional under letter of intent.

[00:08:33] And so that's a really allowed us, these are small assets with obviously pretty good velocity there, but we're building an asset of scale that. And then as important as like the growth metrics I mentioned, I think it's the metrics or the progress around team building and infrastructure building. And I think in these kind of rapid micro consolidations, you've gotta be willing to invest heavily in infrastructure to deliver on the promise of what the consolidation offers.

[00:09:07] Sean Mooney: I mean, it's really interesting to see this is a midstream kind of process that's working out nicely. Maybe if we go back to the way back machine, Doug, I'm curious. How do you even kick off a consolidation for this type of business and what are some of the keys to success to get these things started, right, so that you can get to this nice trajectory that you're on.

[00:09:26] Doug McCormick: The investment thesis that we talked about, the market opportunity. Can you actually do consolidation? I think that's all interesting in the context of is this an opportunity that can yield attractive investment? And then it's turning that into tangible action that I think can challenging, but gets down to, okay, so let's develop.

[00:09:45] Underwriting criteria under that we're gonna use to decide which assets we're actually gonna go buy. So for example, in this case, there were a couple key decisions that we spent a lot of time thinking through. One was service mix, right? So within lawn and care lawn treatment, our view is the value of a subscription model, which is like the treatments that you put on your lawn throughout the year is very different than maybe things actually cutting.

[00:10:13] Installation around new landscaping, which is more episodic. And so we kind of developed a thesis around, okay, what kind of quality business are we gonna try to go after in this space? I think for us, the other one was this question of geography, and I kind of mentioned the attributes that led us to the Mid-Atlantic states, but I think there's another element there that influenced is this control.

[00:10:41] Trying to be a super regional where you get some modest overlap in terms of ability to manage, ability to cross sell, ability to level load resources. So we tried to be relatively dense, or if we're going outside of our core geography or making a commitment to a beach head where you're gonna have some minimum viable scale, which may.

[00:11:10] How do we actually execute is working with our ops team around what are the actual benefits of scale that we can deliver to the business owner or to the collective p and l. And so in this business, purchasing is a big opportunity just as you think about being able to consolidate, spend, and then just customer acquisition, how to best in class.

[00:11:43] That resource across the entire organization.

[00:11:48] Lloyd Metz: This episode is brought to you by HCI Equity Partners, a lower middle market private equity firm, focused on partnering with family and founder owned manufacturing, service and distribution companies. ICV Partners, an innovative private equity firm, supporting management teams of leading companies at the lower end of the middle market and BluWave.

[00:12:12] The Business Builders Network connecting the most proactive business builders in the world with the best of the best service providers for critical variable, on point, and on time due diligence and value creation needs. Now, back to the episode.

[00:12:31] Sean Mooney: When you've proven out the thesis, you're saying, all right, we got something here. You've done the work. You've got some levers that you can pull for value creation. How do you all think about. Really even getting started, do you think we're gonna start with like a HoldCo team first or a platform team first?

[00:12:47] Does it differ for different thesis? How do you think about a chicken or egg?

[00:12:51] Doug McCormick: Yeah, I think this is like the hardest thing to navigate is how do you get your toe into the water? And so we've done both. We've backed a CEO to go run a, and then we've also started with a platform and I would, I think starting with the platform is generally a little easier in my mind.

[00:13:11] 'cause you can buy a decent asset. I think you can learn a lot about the business. You can develop the pipeline and then I think you have a lot more to sell to a very accomplished CEO who's kind of been there and done it before because you've got the credibility, you've got the platform, you've got the playbook.

[00:13:28] And so we probably more frequently than not start with a platform and try to build a team around that platform as the needs evolve.

[00:13:36] Sean Mooney: I'm curious, really, for both of you. One of the challenges I'd say when we would try to back a. Is there's a, I think a massive amount of resilience that's needed to be in your seats where you have to be used to saying the word no a lot.

[00:13:49] And one of the challenges I would see is operators when they're like an executive in residence or have a dedicated kind of like theme that they're being invested against. Like that move one, you kind of have to get moved one pretty right? Often, maybe less so in certain cases. There's a lot of kind of gusto in the beginning and then the nose start wearing down to get into that first kind of beachhead.

[00:14:11] And then they start losing discipline and it's just harder to get into that first move without kind of everything else being built. Whether it's the getting the A or saying like the executive just says, I'm just tired of nos guys, can we just do a deal? If y'all experienced that and add you kind of work through that,

[00:14:27] Lloyd Metz: that is definitely a tension.

[00:14:29] You have to strike the right balance and often we will go through a process where it is. Oftentimes the leadership team's first time seriously pursuing m and a. And so we'll look at opportunities together. We'll talk through the criteria that we're gonna evaluate opportunities together. So then when we see opportunities, you can say, all right, this has some positives, it has these negatives.

[00:14:58] How do we feel about it? Do we want to proceed? What do you wanna learn more and sort of learn together so that a no isn't. We, the private equity sponsor, saying no, after they've done some amount of work or they've gotten emotionally invested, we try to walk down the path together. They see how we think, we see how they think, and then with time and a couple of reps, the leadership team generally figures out, okay, I think I got it, and then you can kind of give some more latitude and some more rope for the leadership team to go after it.

[00:15:33] That at a high level is how we tend to approach it. In other cases we'll develop a list of companies that we think could be good, add-on acquisitions, and then we'll share it with the leadership team. And in the course of them, if they don't already know, the companies getting to know those companies. So then that'll be a list for them to go outreach to themselves and get to know, or go meet at a trade show or something like that.

[00:15:59] So as they learn, we learn and we kind of go through it together.

[00:16:03] Sean Mooney: I like that approach. It's kind of like, here's the scorecard right at the onset. Here's a, we're looking at it in a common way.

[00:16:09] Doug McCormick: Listen, I think that's a great way to do it. I think the challenge for me that I've experienced is there's a pretty big leap of faith by the CEO in residents to go make that jump.

[00:16:19] 'cause they're underwriting a couple different things, right? They're underwriting that we can find a good platform. They're underwriting that the sponsor actually has the appetite under that.

[00:16:33] It highlights one thing for me. I think it's very interesting to talk a minute about the core competency of the CEO that you're looking for for one of these, like is it a lawn care professional or is it a person who has experience in technical services with lots of consolidation working with a private equity firm?

[00:16:51] And I would argue in many cases, like that's a better place, at least in terms of how we interact with that professional, for them to navigate working. I think the balance that we're trying to strike is I want to be credible enough in the space, and I want to have a platform that's big enough that I can attract somebody that's managed a much bigger asset with great success, and they're comfortable enough with the maturity of the play that they can see the value creation opportunity.

[00:17:24] And if I do that well, I can get them in relatively early. And I'm not gonna have to change that person out over the course of the development. So my concern is if you hire right up front, you may have hired the person that's good for the first half of the journey and maybe not capable for the second half.

[00:17:41] This is the part of the business more so than the science, but trying to time that in a way that you can hire the person that can carry you all the way through exit.

[00:17:56] Lloyd Metz: Business in the first half and the scale of the business in that first half versus the second half. That's a really important consideration

[00:18:05] Doug McCormick: and maybe arguably different skill sets, different core competencies. The things that you needed to get from 30 million of EBITDA to a hundred are different than five to 30, which are different from zero to five.

[00:18:16] And so just acknowledging those different skill. We obviously have an ops team. We try s give whoever our managers range. Support that journey

[00:18:28] Sean Mooney: and in this case, Doug, did you start with the platform or the executive?

[00:18:33] Doug McCormick: We started with the platform, put probably three or four deals together, found an executive we were super excited about, brought him on.

[00:18:42] We did a bunch more m and a and have subsequently internalized, we've added the CFO and head of MA, so we've internalized some Highend capabilities. All those managers. Super capable, super successful. Came from much bigger assets working with private equity and a consolidation play. And in my mind, that's a real validation of the progress we're making.

[00:19:05] They've seen this playbook, they've got experience, and they chose to come down market because my belief is a, it's a fun part of the market, but also for the right individuals, real predictable value creation.

[00:19:17] Sean Mooney: They've seen the movie before. They know where the puck is going. I can't think of one more metaphor, but there's probably a third metaphor in there.

[00:19:26] Lloyd Metz: Hey, Doug, just curious how, how much time was it between your investment in the platform, those three to four acquisitions, and then bringing in the CEO? How long was that time period and who was sort of leading the organization until the CEO was brought in?

[00:19:43] Doug McCormick: So I'm high here, but roughly six months, three acquisitions.

[00:19:46] This kind of dovetails into a slightly different topic, which is when we go out and pitch these type of opportunities, we are trying not to have businesses that we're buying from entrepreneurs, but we're trying to find partners that see the same vision that we see wanna reinvest in the business, want to continue at least for a period of time with local responsibility.

[00:20:08] And so like we think we're buying really nice business in a.

[00:20:15] In many ways independently and very well with the existing leadership team, and we're trying to build kind of the corporate capability above that can do things like m and a, consolidated finance, it, purchasing, et cetera.

[00:20:29] Sean Mooney: How do you do those first few acquisitions? You don't have your dedicated m and a professional, uh, acquisition minded CEO or CFO, and yet, how do you kind of get those first couple going to get the flywheel spinning?

[00:20:41] Doug McCormick: I think that's what shops get paid for. So that's, I think our core competency. It's thesis underwriting. It's having transaction competence that we can serve kind of as that in-house M and A shop. And I think it's the ops team to help three independent businesses in this case begin to collaborate and work together as we build the senior team.

[00:21:04] Sean Mooney: It's a great, Jim Collins. Kind of good to great in my head here, where it's really hard. To get that flywheel going. Right. And I'm sure you know these individual entrepreneurs look at that and they go, gosh, how do you even do this thing? But you come in with the expertise and you can get that thing spinning and then they can get the whole engine kind of going faster and faster.

[00:21:22] But it sounds like the expertise you bring to get it going is no small feat.

[00:21:27] Doug McCormick: There's a big element of salesmanship there. And I mean that in a positive way. 'cause you articulate wealth.

[00:21:36] Off the table, but also reinvest meaningfully in a way that they participate in the upside. And this is not relevant to all consolidations, but in some ways this is a branch based organizational p and l structure. And so if you're buying good businesses and the owners are still aligned with you, you should be able to run independently for a period of time because the things you're incorporate are meant to be not business model for here.

[00:22:05] You got pretty much 90% visibility on the year when you sign up your customers in the spring because you know kind of what your backlog's gonna be for the next nine months.

[00:22:14] Lloyd Metz: Doug, you, you mentioned pitching, you use that expression a couple times. What exactly are you pitching and to whom or are you pitching your investment thesis to the business owners?

[00:22:28] Talk to us about that. What did by that

[00:22:30] Doug McCormick: great.

[00:22:34] Pitching or the selling that happens in this kind of consolidation where a lot of your targets are proprietary is very different than the pitching you may do if you show up at a management presentation in an auction, right? Because in that environment, you have a banker that set the table and created the environment that you're gonna, you didn't have to worry about how to get the meeting.

[00:22:55] You just know when you go in, you've gotta do your work and demonstrate that you're good, steady partner.

[00:23:03] If it's a seller that's a private equity firm, convince them that you are money certain, if you will. And in this case, because it's outside of a process, a, there's no guarantee of getting the meeting. So I think it's much more entrepreneurial in terms of like how you're networking, how you're getting into the flow of deals and entrepreneurs.

[00:23:22] And then I do think you're selling, in many cases, we don't view our goal as we're going in try to.

[00:23:32] To convince an owner that he should sell, first of all. And then we're convincing him that we're the right buyer and then we're trying to convince him that not only are we the right buyer, but he would be well served to be a partner. And so I think you've gotta be scrappier in terms of like getting into the place where you can put yourself in that conversation.

[00:23:51] And then secondly, articulating like why a partnership is so compelling. And I think that's economic attributes as well as like partnership capability attributes.

[00:24:02] Lloyd Metz: Got it. That's pretty impressive. Aside from purchasing and procurement, what other benefits are there from scale in this business of lawn and care?

[00:24:13] Doug McCormick: I think purchasing is certainly one. Learning how to think about customer acquisition in a sophisticated way is another one, and many of our entrepreneurs have.

[00:24:29] Community member and doing really good work. So it's been kind of like word of mouth and so accelerating that investment, I think can be critical. I think KPIs that allow you to think more effectively about how we're managing the business. Customer retention is always powerful in this business. Many of these organizations operate off the, so.

[00:24:55] System versus individual branches. A lot of our businesses aren't close enough together yet, but over time, I think density and customer or tech training are the kind of things that you can benefit from with scale.

[00:25:09] Lloyd Metz: Can we go back for a second to something that you said? You talked about customer acquisition.

[00:25:14] Generally these companies have been built through word of mouth. What sort of different approaches are.

[00:25:22] Doug McCormick: Yeah, so I think first of all, like this is a business that, the right way to think about it is lifetime value of customer. How much does it cost me to service customer? What's my profit over the duration and how long do I retain a customer?

[00:25:33] Pretty high retention rates here. So we think lifetime value is pretty high. And as I mentioned in many cases, like we've got entrepreneurs spend in $50,000 on marketing. And so if I said, Hey, we're gonna think about customer service differently, we're gonna think about outbound calling, we're gonna about SEO.

[00:25:51] We're gonna think about just marketing spend and kind of where do you get that point of increased marketing spend until you get close to the lifetime value of the customer.

[00:26:00] Sean Mooney: How do you think about brands? You're buying these little kind of entrepreneur owned businesses. Do you bring a Halo brand in, keep the local brands do a mix?

[00:26:10] What's the approach?

[00:26:11] Doug McCormick: In this particular case, I think there's a fair amount of brand equity at the local level. So we think, don't change that name. Keep the brand equity there. The name recognition is important, and I think that's the right way to think about maximizing the value of the brand from a customer perspective is to have a portfolio of brands.

[00:26:30] But I think like we're a branded business in a couple different ways. From an m and a perspective, we go to market as Lawn Pro partners. I think that's where people at trade associations would get to know that name as somebody who's a consolidator that's aggressively partnering and purchasing businesses.

[00:26:46] I think ultimately we think about building a brand for the next buyer. And so I think a consolidated brand that people can relate to is important in that regard as well. We're obviously gonna sell this not as a collection of 40 different branch locations, but one aggregated brand at a corporate level.

[00:27:04] Sean Mooney: So it could be Smith and Associates, a Lawn Pro partners company.

[00:27:10] Doug McCormick: Yeah, I, I think that's the, like you get the best of both worlds. You. You understand you got the backing of a well-resourced corporate.

[00:27:19] Lloyd Metz: How many of the business owner entrepreneurs, of the 16, soon to be maybe 18 companies that you've acquired, how many of them decide to stay for the ride, and how many use this as a off-ramp for their journey into retirement or whatever they want to do next?

[00:27:39] Doug McCormick: I would say high percentage, call it 90. We were able to sell the vision and the chance for some wealth creation on the backend, and I would say the stats are pretty similar for employee retention. Some of that will change over time, not because of dissatisfaction, but let's remember. One of the key objectives of a lot of these transactions is not only liquidity, but it's a succession planning event, but that will work itself out in the context of several years.

[00:28:09] Sean Mooney: One of the secrets is not really the right word, but of excellence, I guess, where. You keep them engaged, it's a local business. Local relationships. You probably know all their customers by name, or at least some of them, if not many of them, like having a continued equity interest. Is that one of the ways that kind of really keeps them kind of pulling the OS together as a group?

[00:28:28] Doug McCormick: Yeah. Listen, I think, you know, our view is we're buying like top quality businesses in our marketplace, and so we bought these businesses because of the management teams are there. So finding ways to kind perpetuate that engagement and have those owners. There can be collaborative exchange across the portfolio.

[00:28:48] From a best practices perspective, I think is key.

[00:28:51] Sean Mooney: It seems like one of those classic cases where the second buy of the apple also could be much bigger than the first.

[00:28:56] Doug McCormick: My view is it's like mutually dependent relationship where by allowing us to buy some of the business and reinvesting, they can accomplish some goals that they couldn't accomplish without us.

[00:29:06] And at the same time, we can't effectively do the consolidation unless we got real buy-in and real leadership and.

[00:29:14] Lloyd Metz: How do you think about the financing of these acquisitions? Are you basically putting in all equity up until some point and then you put in a, a more traditional balance sheet with debt and equity when you get the CEO and CFO in place?

[00:29:30] Or are you doing it all equity till close to the end, or do you get a delay draw term loan at the beginning? I just, can you talk us through that a little bit?

[00:29:40] Doug McCormick: So I think one of the value creation opportunities here in the whole thesis is that I think the belief that as you get scale, the cap rate for that asset goes down over time.

[00:29:50] And so you can avail yourself to more leverage. And so our general view is early on it's minimal debt or no debt. You begin to put a couple pieces together, you started to solve the management team issues and have the right kind of fidelity and financials, and then you can put on modest debt. And we've made enough progress with this asset where we're into a delayed draw term loan situation.

[00:30:13] So we've got like a max leverage test that we incur, we think about like follow on acquisitions, but that really makes the acquisitions on the backend particularly accretive, right? Because your equity base is substantially all in and you're really kind of adding financial leverage to.

[00:30:32] Sean Mooney: Almost like you're over equitizing at the beginning when risk is higher. So you're going with a much lower risk capital structure, and as things start humming, then you grow into a capital structure that a typical buyout go with. A major platform play might put a lot more at the beginning, but you're starting off lower and then growing into that versus kind of like starting off with that.

[00:30:55] Doug McCormick: Yeah, and I think two things. One, it doesn't really affect the math on the investment too much. It does from a little bit from an IRR perspective, but I'm getting to get to the same invested capital base. Just gonna do it a little bit more front end loaded so it, it doesn't feel very punitive from a cost perspective.

[00:31:10] It allows you to manage volatility nicely early on. But I.

[00:31:23] Valuable in the context of how to think about the m and a trade on the backend.

[00:31:26] Sean Mooney: It's a really good kind of risk adjusted return approach

[00:31:29] Doug McCormick: over time.

[00:31:30] Sean Mooney: To go a little back earlier in our conversation, you're talking about one of the ways you keep these owner entrepreneurs engaged is that they roll over or reinvest a, a meaningful portion into the larger company, understanding that they're all gonna go kind of further together as part of a bigger platform that displaces more water, if you will.

[00:31:50] How do you think about, now you're, you're going through, everyone's engaged during your ownership period, you're getting ready to exit. How does the next buyer then get comfortable that these same owner entrepreneurs are gonna be engaged during their ownership period?

[00:32:04] Doug McCormick: A couple things. First of all, our experience has been that many of these owners will reinvest yet again on a smaller amount That's.

[00:32:20] And so you get a little more organizational maturity. You got a little more systems and processes and that requires kind of less pure alignment with an entrepreneur who knows the business really well. And you've gotta grow the labor force in a way that you've got more depth.

[00:32:35] Sean Mooney: So this is less one truck and a dog.

[00:32:37] And now this is a company that's a company. By the time you're, you're through it. And the owners are equally kind of engaged or at least largely engaged in 'cause they've seen the movie. Turn out successful and they want to keep on keeping on, if you will.

[00:32:51] Doug McCormick: If you get back to one of the premises early in this conversation is we think we're relatively early in the consolidation phase, and so I would argue every owner of this business for the next decade will have some meaningful portion of their managers who sold recently and some meaningful portion that sold more than three years.

[00:33:11] Well, in many cases buy this asset in part, in large part because of their expectation around being able to underwrite m and a on a go forward basis.

[00:33:19] Lloyd Metz: At what point, Doug, in this journey, you were talking about innings, so I don't know if we're playing baseball, basketball, or hockey, but if we're playing in quarters, right, at what point do you start to build out that integration team?

[00:33:37] So that, as you pointed out, when now you go to find the next capital sponsor, they're gonna underwrite m and a as a core capability of the business you've built. When do you start standing that up internally? Is that a third quarter kind of project or,

[00:33:55] Doug McCormick: it's a great question. I think some of it has to do with the specific business and the velocity.

[00:33:59] And remember I said core competencies. Some of the core competencies are defined as private equity consolidators. So in many cases, I mean, I think as a CEO, two of my major priorities for that CEO are gonna be selling the m and a vision and having the leadership to help facilitate integration and collaboration across the team.

[00:34:23] So it starts with the CEO. In this particular case, I would say within a year we hired. From a different experience and could think about it in a kind of systemic process oriented way.

[00:34:37] Sean Mooney: I really appreciate not only the m and a, but bringing in chief integration officer really makes a lot of sense, and as I reflect on every time our bat phone gets called in PE world for these consolidation strategies.

[00:34:52] Not every time, but a lot of times it's because of the lack of emphasis on the integration. I. They bought faster than they could kind of normalize and integrate and then just chaos reigned. And so to hear that is like so early in the process is really good and impressive.

[00:35:09] Doug McCormick: And in some cases that was a reflection of first of all, the CEO to his credit acknowledged like, hey, I think we need that.

[00:35:15] One of the reasons we needed is because like in 12 months we were close to 10 deals. And so like you

[00:35:25] Sean Mooney: integration for this is of. Accounting IT, business intelligence, what are, where does that work really kind of take place?

[00:35:34] Doug McCormick: Let's go big picture that we talk about this, but I actually think my experience has been different. Business models have different integration demands, and I think one of the things that lends technical services to consolidation is that the integration can be pretty light and you haven't like foregone long in this.

[00:35:57] You can integrate a couple key things like financials, it purchasing, and maybe some overall marketing spend, and you still left the core p and l intact close to the customer at the branch level. So I think we're trying to be integration light, but we don't view that as a shortcut that's appropriate for the needs of the business.

[00:36:20] Sean Mooney: So as we round out our conversation here, Doug. You're kind of like in the midstream here. You've got this business kind of operationalized, integrated. They've got their acquisition machine going, they've got the integration machine going. You've got people kind of pulling the ORs at the same time. When you get to the point where you say, okay, it's time for the next partner to come up, why are the next buyers gonna view your business here as really an attractive business that they should invest in for the next period of its success?

[00:36:51] Doug McCormick: Yeah, I think very simplistically it. It's that they will see the same things we saw. Very nice large market, 15 billion, very fragmented, nice business model in terms of margin and organic growth. But on top of that, they will see a proven acquirer that basically has done so much m and a that you underwrite that the same way you underwrite organic growth.

[00:37:13] And that acquire has also demonstrated a in integration and. That the next buyer should be able to underwrite as this team can double or triple this business without me having to navigate a transition. It's kind of like same attractive attributes in terms of business model and market with a much lower risk profile on ability to execute against that promise.

[00:37:37] Sean Mooney: Before we started having these conversations, Doug, the thing I never really appreciated as much as I should have is this whole idea that. Acquisition growth when demonstrated, can be done consistently in a repeatable, excellent way, is not a whole lot different than organic growth, if different at all, and can be underwritten the same way.

[00:37:57] It's not easy and has to be done excellently, but it can generate the same kind of predictable growth, that organic common product growth.

[00:38:06] Doug McCormick: It.

[00:38:10] You control the pace, you control the activity set that gets it done, and I'd acknowledge it. It's much more expensive, right? So I'm gonna capitalize an earning stream versus kind of grow it. But in the context of how do I deploy both super compelling, I think

[00:38:26] Lloyd Metz: that's a pretty impressive, and there are lots of examples when you get it right, both your assessment of the space, right?

[00:38:34] Being as fragmented as it is and large enough that there's enough open field for you to keep. Acquiring, and then if you get that internal capability right for acquisition and integration, you have a shot at building something pretty special. So super excited to hear how this turns out.

[00:38:54] Doug McCormick: Yeah. Well, thanks.

[00:38:55] Me too. Like I said, we're making good progress, feel really good about the market and the team and the business model, but these things all take work and they all have their stages. We're excited about where we're.

[00:39:05] Sean Mooney: Well, gentlemen, I think this has been another conversation where I've been the massive beneficiary of free consulting from both of you, so thank you.

[00:39:12] Yeah. Yeah. It's another free MBA class and I do mean that every one of these things are incredibly helpful to me personally, and I appreciate that. So want to thank you once again for kind of pulling the curtain back and sharing how you think about the world.

[00:39:26] Lloyd Metz: Yeah. Thanks for sharing, Doug. Really appreciate it.

[00:39:29] Doug McCormick: Thanks for the interest. Thanks for the conversation. It was fun guys. A special thanks to HCI Equity Partners, a lower middle market private equity firm focused on driving transformational growth through consolidation strategies by partnering with family and founder owned manufacturing services and distribution companies.

[00:39:48] Learn more@hciequity.com, ICV Partners and Innovative. Lower middle market private equity firm, supporting management teams of leading companies at the lower end of the middle market. Learn more about IC v@icvpartners.com. And finally, BluWave the Business Builders Network connecting the most proactive business builders in the world with the best of the best service providers for critical variable, on point, and on time due diligence and value creation needs.

[00:40:20] Learn more about BluWave@BluWave.net. For further information on H-C-I-I-C-V and BluWave and relevant topics discussed here in the episode, please see the episode notes for links.

[00:40:34] Sean Mooney: The views and opinions expressed in this program are those of the individuals presenting and do not necessarily reflect the views or positions of any other persons or entities, including those referenced herein.

[00:40:45] No representations, warranties, financial, legal, tax, or other advice are made herein. Consult your advisors regarding any topics discussed during this episode.

Join Doug McCormick from Oridian Capital Partners, Lloyd Metz from ICV Partners, and Sean Mooney from BluWave as they explore timely private equity topics and offer their seasoned perspectives on crucial areas of focus within the industry. Gain valuable insights from these industry experts in this engaging podcast tailored for PE professionals.