Private Equity Strategies: Crafting the Future for Transformative Growth

[Intro] Lloyd Metz: Get ready to peer behind the curtain of the private equity universe with each episode of "Best But Never Final." Learn the inner workings of private equity and how top business builders shape, transform, and innovate companies to their peak potential. 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. Let’s go.

[00:00:00] Sean Mooney: So we're really excited to be back here for episode number two of the best, but never final podcast, Lloyd and Doug, how are things going?

[00:00:09] Lloyd Metz: Great, Sean. Happy weekend Eve.

[00:00:12] Doug McCormick: Yeah, there you go. It's a Thursday. It's a Thursday. Let's get it done.

[00:00:15] Sean Mooney: That's great. Well, we've got it. The first episode I think was a really great primer for how the rest of the series is going to unfold.

And it's this whole idea of demystifying private equity. We're talking about top topics. thinking about how you all perceive things and really bringing in the world of private equity to, you know, audience within private equity, but also outside of it. So the first episode, we talked about the things that we all look at when assessing a company to see, is it a good company? And can it be better, or is it meeting the standard to continue proceeding with an investment assessment? This one, we're going to talk about now the company is good enough and you're starting to inform your value creation plan.

What could this company be or should this company be? And how do you get comfortable with the art of the possible before you actually make the investment? Does that sound like a good plan, Lloyd and Doug?

[00:01:17] Lloyd Metz: Yeah, absolutely.

[00:01:18] Sean Mooney: Great.

[00:01:19] Doug McCormick: I like it.

[00:01:20] Sean Mooney: So maybe to kick things off, you've got this thing, it's made it through, you've looked at your market and your financials and you're comfortable with the team and now you're thinking about what do we make, how do we make something into this kind of you know, even better version of itself.

So Absolutely. Doug, I'd be curious, you know, what's the next thing you do?

[00:01:42] Doug McCormick: Yeah. Yeah. Well, first of all, Sean, I would just comment. I think this is an interesting evolution of the market. And what, what I mean by that is as, as the deals have become increasingly competitive, I think really good investors have to ask the question, not just what is the business, but what can it be?

And I think in many cases, that's what we're underwriting is our ability to kind of execute that transformational growth plan. And in some cases, the entrepreneurs. may have a narrow view of what the business can be based on their successes, their failures, and the resources that have been available to them.

And so I think you know, private equity investors often come at it in terms of how do we maximize values with less constraints? So we have more capital to grow organically. more capital growth for M& A, maybe less expectations for distributions to owners. And so, you know, essentially we're, we're asking, you know, if we have less resource constraints, you know, how do we think about maximizing value?

[00:02:38] Sean Mooney: Yep. I think that's, that's really spot on and it makes a ton of sense. Lloyd, do you have any perspectives on that as well?

[00:02:45] Lloyd Metz: Yeah, and maybe we can talk about it at greater length at some point, but for us, we spend a lot of time trying to get in the head of that entrepreneur. What do they want to do?

What are their aspirations? What are their crazy ideas and dreams that they're kind of afraid sometimes to speak into the universe? What is their capacity for change? What is their capacity for learning something and confronting kind of that that scary idea that they have? How capable are they to be coached in, in learning something new or approaching something new?

We, we spend a lot of time trying to figure that out

[00:03:33] Sean Mooney: and what happens, Lloyd, and so you're, you're going down this thing, you've kind of assessed the comp, assessed the company. You have a good sense, you're now, you're saying, is there alignment? How do you figure out if there's alignment and what do you do if there isn't?

[00:03:47] Lloyd Metz: So on the alignment part and I'm smiling as I'm thinking about some of our, our, our previous and current entrepreneurs that we've, that we've backed, they do have an ability to listen. And think critically and learn, they have an awareness of their own limitations and their organization's limitations, and they're actually comfortable talking about it.

And, and once you kind of get those elements kind of figured out, you can have a constructive conversation, right on, on not only how to deploy the capital or to bring in the resources, but someone's willingness to accept it. And run with it. Sometimes it's an exercise of getting comfort and building trust with that entrepreneur so that they're comfortable sharing their crazy idea.

Like one of our you know, founders that we invested behind early days before we consummated our investment, he confided he wanted to buy his largest competitor, which was twice his size. He thought that was crazy, but we're like, okay, I get that. Let's go do that. And we did. But if he hadn't felt comfortable, you know, voicing his crazy idea, we wouldn't have had a really interesting and great outcome.

[00:05:04] Sean Mooney: I'd be. Yeah, go ahead, Doug.

[00:05:06] Doug McCormick: Yeah. Lloyd one of the things you said is, I just want to highlight is super important. You know, you said, Hey, does this person have the aptitude to listen and be a perpetual learner? And that's not as if, you know, guys like you have all the answers. But it's an acknowledgement that anybody that's good in this business has to always be perpetually learning, has to always be open to change their mind and acknowledge that, like, none of us know it all.

And so some of this is just the critical assessment of you know am I excellent in this category or, or this capability and how do I continually get better, right?

[00:05:39] Sean Mooney: I think this, this whole concept that, that both of you are talking about in, in terms of getting alignment. You know, before the deal happens, at least in my experience in the early days of PE is, is it Doug, maybe to your point earlier on, it's pretty new, right?

And so even as I thought about my value creation plan in 2005, it was, let's upgrade the accounting system and add a salesperson and like, let's go buy low, sell high. And, you know, the world's changed a lot from that. But the other thing that I think has evolved a lot is. I think a lot of the time when you would buy a company, it was based upon an investment banker's kind of portrayal of the opportunity that both sides knew was overly optimistic, meaning that the seller knew it was and the buyer knew it was.

And we used to go through this awkward dance right after we bought the company. Where you would ask the CEO, that was your real plan when you showed it during the management meeting, right? And they go kind of really awkwardly, like, yeah, and, and and we go, well, let's see how you do hit those numbers.

And they'd miss the first quarter and then the second quarter and the third quarter, the whole time we knew that wasn't their plan. And so, but, but we would go through this awkwardness and, and, and I think as I grew and evolved, I eventually. Decided to rip off, , the, you know, kind of this kind of false, you know, sense of of shock and, and, and just kind of get that alignment here.

But I think that's a, that's something that's relatively new, at least in my experience that that involved with you all as well. Or were you guys. Kind of better

[00:07:11] Doug McCormick: Sean. I have to say, I have no idea what you're talking about. I've never had a company miss budget. It's certainly not out of the box. So I just I can't even comprehend it.

No, I think it brings up a really a broader topic, which is there's there's this dynamic. That's a challenging balance, right? Because in some ways you're trying to be. brutally honest about the alignment of partnerships, what they want to do with their business and how they think about their role on a go forward basis.

And that requires a lot of transparency and trust and candor. And at the same time, you know, you're trying to critically evaluate their prospects and they're trying to put their best foot forward. And, you know, my, my experience has been that, you know, brutal direct communication is generally rewarded.

And the trust that is established from that far in a way exceeds the, the challenge that happens from those kind of hard discussions.

[00:08:08] Lloyd Metz: Yeah, that, so, so Sean, we probably could have a whole episode on, on this element, right? So it may come as no surprise, given what I just said a couple of seconds ago, we try to suss out what's the entrepreneur's ambitions.

Even before we close and sometimes you'll throw out commentary like, yeah, that's probably banker numbers, right? What do you guys really think? Right? And that's a bit of an art to get folks to trust you because of course, sometimes if. You know, the natural fear is, if I tell you the truth, you're going to retrade the price and blow up the deal.

Right? So, it's a bit of an art in terms of how you finesse it, but what you really want to make sure is that there's no misalignment of expectations. To your example, you know, the numbers in the marketing materials are overstated, but you need to hear from that entrepreneur. Yeah, they're overstated, but they're still here.

This is what I think. This is what the team can deliver. This is what I really want to go do. And oftentimes that's plenty of growth or what have you to make your investment worthwhile. But you kind of need to get on the same page just mindset wise. And that's to me, the point of the exercise.

[00:09:28] Doug McCormick: Hey, Lloyd, maybe just to riff with you a little bit.

So how do you think about this balance of, you know, if you're advising an entrepreneur and you're not on the other side of the table of how do you put your best foot forward, but also do it in a way that's super credible and believable? And are you better served you know, kind of being more. balanced about, you know, here's, here's a range.

I have a lot of confidence in it. Here's why, but I'm not going to sign up for, you know, the crazy numbers because you know, that they're not credible. Would you advise that? Or do you think it's, you're forced to play that game?

[00:10:01] Lloyd Metz: Yeah, it's to, to some extent you're forced to play the game, but what you'll want is that outer edge, that outer end of the range as you're framing it, you want that entrepreneur to say, no, that's possible.

There's some things that I'm not comfortable, 100 percent comfortable today getting, that's why I'm looking for a capital partner to help bring the resources, the confidence, the handholding, whatever it is. To go get that upper range, right? But if the entrepreneur doesn't believe whatever that upper range scenario is, is even remotely possible, then I don't know how you ever get alignment.

[00:10:42] Doug McCormick: Makes sense.

[00:10:43] Sean Mooney: And I think that the other way that, that, that I would look at it. And in terms of those situations is there's a, there's kind of a two way street. I think both of you have touched on this is in some ways the entrepreneur doesn't even know that they have, they might have an opportunity to take on more, more than they ever thought.

So Lloyd, to your point where you said, Hey, I want to buy my largest competitor and they're probably afraid to say that. And in, in a lot of times, entrepreneurs are, are operating in this highly constrained environment and then, you know, HCI and ICV can come in and say, no, we're going to give you fuel. And so you can get them talking about the ups and that's also, you know, I found it's also often a good way to get them also thinking about the realistic.

Elements of their plan that are maybe overstated. So you give them kind of the, you know, the, the upside and the downside and get them talking, and then you can have an honest conversation about what the business is. And then also have this kind of the dare to dream part of the discussion as well.

[00:11:41] Doug McCormick: Yeah, that's it's interesting because you know, we, we kind of joke two kinds of forecast lucky and lousy, right? And, and the reality is there's a lot of different ways to get to really good answers, right? How much M&A, how much organic growth, how much new product introduction. So I think like exploring the art of the possible kind of is a really interesting way to size the prize where you get a lot of conviction in the longterm opportunity and you know, there, there may be a little bit of volatility on the way there.

[00:12:08] Sean Mooney: One of the, one of the things that I think would be an interesting. Kind of flip side to the conversation to talk about is, you know, a lot of times when there isn't that open dialogue and you don't get there, you know, and you've got this in certain situations, you will get a pretty meaningful mismatch and expectations and ultimately.

A private equity firm who's working for their investors and has, you know, their own kind of world of pressure and challenges. If there's a huge mismatch, they're going to have to make their own change in the leadership team. And no one wants to do that ever. You know, I, I can't ever think of 1 investment I ever made where I was like, oh, I hope we get to make a change.

But at some point, you have to, if you can't have that open communication. So, I think for CEOs, listen to this, who are hoping to take on private equity. Even out of selfish altruism, there's a great reason to say, you know, start the open dialogue because you're just setting yourself up for failure. If you, if you all had those types of experiences where you just couldn't get in the talk and you could never align expectations, but at the end of the day, you have to make that business successful.

And if you can't, then you've gotta do something.

[00:13:18] Doug McCormick: Yeah, listen, I think you know, you, you're kind of going down the path of, you know, when do deals fail and there's, there's kind of two different stages. Sometimes we don't ever get to the deal. And then the second is you got into a relationship or a partnership that was ill conceded. So maybe just, uh, I'll talk about the first part of that, the, the not getting the deal part.

First, first and foremost, listen, this is a time consuming process, right? So if you sign a letter of intent with an investor, you're probably signing up for 60 to 90 days of distraction, a lot of expense to get to an answer. And so we take it very seriously when we engage in one of those because we know we're going to spend a lot of outside dollars, could be a couple million bucks, we're going to burn a lot of internal resources and, you know, there's a counterparty there that's, uh, going down that same path.

So, so when it, when it doesn't get to consummation, you know, we, we feel like that's a real failure. The flip side of it is, let's acknowledge Getting to know before you enter the partnership is, is better than getting to know after you've entered the partnership, because then you got real breakage costs, right?

And, and personally, I just think it gets back to when you're outlining the framework of a letter of intent, you're being very specific about what work you need to do to get there and what your expectations are for success. And, and, you know, getting into the, some of those hard conversations, because you're going to have them sooner or later, it's either before or after, right?

[00:14:43] Sean Mooney: Lloyd, what are your thoughts?

[00:14:45] Lloyd Metz: Yeah, no, I think that's, that's right. And, and what we, we try to do at ICV is figure that out quicker, sooner. So we don't wind up in the situation that Doug just outlined, because you don't want to be misaligned with the founder entrepreneur who built the business and now you're, you're hitched, you're married and that's just not good.

So we try to figure out those elements. How coachable is this person? How well do they listen? Do they have real aspirations? Are they just trying to retire and, and, you know, put liquidity in their, their account and, and de risk their lives? Like all those things are worthwhile, but that they don't match up with our objectives, then we pass.

We're not, we're not a super high volume shop. So we feel we can afford to pass on opportunities. If they don't match up, they don't line up.

[00:15:35] Sean Mooney: I think both of those are, are, are really good points. And, and what I think a lot of people and on both sides of the equation, but I think particularly entrepreneurs who don't do these regularly types of investments with, with private equity partners is that this is a three to six or longer year marriage that you're going.

And this is a partnership where you're talking with them every day. And if in, in, in making the investments upfront, like you're talking about. Are 100 percent in the best interest of both parties because life's too short. If not, and I really like how both you're saying, you know, if it doesn't, let's, let's not, let's not go into this because it might not be, it might be one or the other.

And then sometimes you're just not, you know, one or the other for various reasons, just aren't the right fit for each other. And it's better to just continue on with life than for something that's really hard. And so I, I think that's a, that's a great perspective, but if you do put the, if you do put the work in up front, you do the counseling up front, you know, whatever the, you know, when I, I forget what it was, I was called, I was married in the Catholic church and they put us through this eight week.

All I know, all I know is all the things that I negotiated for got thrown out the door after week one, but that's a whole nother conversation.

[00:16:52] Lloyd Metz: Right, right.

[00:16:54] Sean Mooney: But, uh, but, it makes a lot of sense to do the work up front. I guess, did either of you have any stories where you'd say we did all this work for whatever reason it didn't make sense and we decided to part ways.

[00:17:09] Doug McCormick: Yeah. Listen, I've been doing this. I've been in the business for over 20 years. And so you're, you know, any firm is going to have these, these issues. And what I will tell you is the reasons have always been different. So we've had some cases where the diligence just didn't check out. We had some cases where we're at the goal line and, uh, part of our closing condition was a customer call that went horribly.

And then we've had somewhere when we got. to spend substantive time with the team. We either concluded that we weren't a good match from a chemistry perspective, or like when we were open about what we wanted to do with the business, they decided that that wasn't consistent with their, their aspirations.

And, and I would say that in some cases, all those are good outcomes, right? Relative to everybody went into the, the situation eyes wide open with, with new information, we all made better decisions and I don't, I don't fault the entrepreneur that concluded it wasn't a good fit. At all, I think they made a really well informed decision based on more information.

[00:18:10] Sean Mooney: How about you, Lloyd?

[00:18:12] Lloyd Metz: Ah, you've got me thinking here. So our, our, our track record is largely positive when we've been working with founders and entrepreneurs. In the cases where it hasn't worked, it's largely been with a bit of hindsight, I guess, when the founders weren't able to make the transition to the next stage, which in and of itself isn't, isn't, you know, A deal killer, right?

If, but if you acknowledge that, if you know your limitations and say, Hey, I've got the business this far, and what I'd really like to do is take some functional role or be on the board. I know I can't get it across the river Jordan. Well then let's bring in somebody together who can. Take us to the next level, right?

It's that that last part is usually when it's caused a disconnect, right? Where they don't understand or appreciate or admit their own limitations and that's when they become a blocker

[00:19:16] Sean Mooney: Yeah, and I think that's a it's a good observation and Sometimes I can remember times where we had spent millions of dollars in diligence And you just decide, you know, it's just not going to work.

So let's not, let's not force it. And, and you, you're sick to your stomach for about a week after you have to kind of flush that. But at the end of the day, you know, it's the right decision. And, and for, I really like how both of you, as we're talking about, how do you, how do you build value creation into your plan before you even own the business?

Started with. Getting the alignment with the team, right? Because at the end of the day, business is still about the people. You don't get that right. Nothing else. Yeah, it's much.

[00:20:03] Lloyd Metz: And I guess and I guess, Sean, we. Maybe we're a little bit of an odd duck in this regard. It's not just alignment, but understanding the psychology and motivation and mindset of that entrepreneur or entrepreneurial team.

You know, fact of the matter is people, humans, right? We can, we can be self delusional, right? So they may tell you one thing, but not really. Believe they can achieve it or have the confidence or they they're just saying what they think you want to hear. There are different reasons why people may say something and ultimately be able to do something different or not be able to do what they say.

[00:20:41] Sean Mooney: I think that makes it makes a ton of sense. How about you Doug, any, any kind of final thoughts on this topic?

[00:20:49] Doug McCormick: No, I think Lloyd said it well.

[00:20:50] Sean Mooney: Well, let's, let's segue here. One of the, I think one of the things I'd be really curious to get both of your perspectives on is. You've got the alignment. You understand the motivations of the team.

And a lot of this things are kind of happening concurrently. There are these kind of whirlwind processes, but where do each of you think about looking to find opportunities to create value that doesn't currently exist?

[00:21:18] Doug McCormick: Yeah, Sean, maybe I just start by, by acknowledging in my mind, this is the part of the industry that has evolved most in the last 15 years, you know, in, in a increasingly competitive environment quality of ownership is going to drive outsized returns, you know, kind of relative to median outcomes.

So. I think lots of firms are investing heavily in these capabilities to drive kind of the, we call it the transformation from as is to desired end state. And I think that the engagement model is super broad here, right? So it's in no particular order, you know, investments in sales, investments in operational capabilities financial, not just reporting, but kind of financial analytics, like how to figure out where you're making your money.

IT is a big one for us. Team building broadly and then, you know, we're, we're financial guys. So M&A is a, is a big tool and not just a tool to scale, but really a tool that you can use to shape the business and, and drive, you know, better value prop to the customer.

Lloyd, how about yourself? Yeah.

[00:22:16] Lloyd Metz: So it's interesting. I I'll pick up on the last thing that you said, Doug, that we have found oftentimes. Understanding and articulating the value proposition of the company service or or product to the client or to the customer is a really interesting exercise. I'm always surprised at how many companies.

Don't do that on a regular basis. Don't have a really good handle on what their clients or their customers are buying. They know what they're selling, but they're not really understanding fully what their customers are buying. And sometimes you've gone through that exercise, particularly on the services side.

Uh, we do a fair amount of business services. There's a lot more value that you're delivering. And then once you open the company's eyes, the entrepreneur's eyes to what their clients are buying and the value that they're buying, their eyes oftentimes get really big. And we, we then can easily pivot into a price conversation.

Right, because this client of yours is buying personal career insurance or this client is buying enterprise risk insurance, right? Not just advice or not just some service to handle what have you, but the value that you're selling that they're buying. Is dramatically greater than the price you're offering so you can increase the price now how you do it.

We will talk about it's imbalanced and that's an opportunity with it's it's been pretty impressive at the other opportunities oftentimes come from bringing a different lens. To a situation where we had an investment in a business that was consumer facing, but it was a perishable good. It was, it was an experience, a perishable good.

And so we brought to the table lenses from the hospitality industry and, and concepts from the airline industry to help them reprice and restructure their pricing as well as raise their pricing levels because it's a perishable good. They knew on certain days. They're going to be sold out, and they always had been, and they had the data going back for years, but they never thought about it that way, so they wound up introducing some pricing dynamics, dynamic pricing, pricing up as demand increased, and it was, uh, game changing for them, but they had never thought about it that way.

[00:24:43] Sean Mooney: Pricing is, is, you know, categorically one of the best ways to create free money. The only thing that we've seen, cause we see lots and lots of, of projects for pricing strategy and the actual execution. And it's very easy to algorithmically or mathematically or statistically find the price. And that's not easy, but it's possible to find the lift opportunities.

The harder part and with all seriousness is convincing your head of sales. That they should do this in their best interest because it makes their job really hard. And the only piece of advice I'd give to entrepreneurs, other investors trying to do this is make sure that your CEO is a hundred percent behind this because your, your head of sales, your chief revenue officers, you know, through human nature is going to do a lot of things to try to make it not go forward because it makes her job hard.

And it's scary.

[00:25:34] Lloyd Metz: Now that's, that's a hundred percent right, which is why we'll have these conversations at the CEO level. And really focusing on value and, and try to avoid and unlearn the habits that we frequently find where people are selling based on price and try to get language changed and the conversation and the mindset change to talk about value and talk to your customer about the value that you are providing and therefore what I charge you for it.

Comes out to a different place. Yeah. Notice I didn't use the P word. I didn't use the P word.

[00:26:11] Doug McCormick: Yeah. But I would argue that like, you know, pricing studies, there's an intellectual component to it and then there's a change management component to it. And it's, you know, teaching sales teams. how to sell on value, it's thinking about incentive structures and comp structures that comp on value.

And then it's things like managing all the outliers. And so we, we deal with a lot of businesses that are selling, you know, distribution businesses where you're selling a whole bunch of products and you know, the, the margin variation across that portfolio is massive, right? Because, you know, some people shop.

aggressively for the things that have a certain profile from a price perspective. And then they just throw a bunch of stuff into the cart and there's not a lot of scrutiny on that. So it's thinking about optimizing that portfolio. And Sean, just on this, this point, I look at pricing and really sales broadly as, as one functional area that is probably one of the hardest to get after.

But it's also one of the ones that creates the most value because it compounds every year. You know, if I, if I'm growing my business at 15 percent a year versus 8 percent a year, You know, the compounding effect over five years is enormous. So we've, we've invested heavily in the last couple of years because that's an area that we were historically weaker in.

[00:27:21] Sean Mooney: I think that's, you know, the number one correlate to enterprise value at the end of the day is revenue growth, even in private equity, particularly in venture capital. But PE is going to, is going to show you that. Are there any other things that you look at during due diligence in addition to kind of price in terms of like, can they achieve this hockey stick that's invariably presented?

[00:27:43] Lloyd Metz: I mean, depending on the business we call it operations just broadly, whether you're manufacturing something or even in a service company, but what are the processes that that company follows, what steps do they follow in delivering. Their product or service, and we tend to look at your billing and collections process, which often falls into the finance and accounting.

F. P. and a we look at your logistics processes. We oftentimes will follow an order from, you know, the customer, you know, placing an order and what does that order. How many hands does it touch? What desks does it go across? And then when does it enter a system? And how does it get produced? And how does it get delivered to order to cash?

We often look at we've been fairly successful in companies that we've mapped out the various processes, let's say, order to cash or the sales process and reducing the number of steps in those processes, simplifying those processes, reducing friction for external, you know, Customers and clients, and then oftentimes we have to get different departments to think about their internal customers and clients and therefore reducing the friction and those processes internally.

Right? So it leads to higher cash collections, shorter cash collection cycles. Better client or customer experience. So if you were in tech land, we'd call it talking about UX and UI, right? What's the user experience? We try to take some of the friction out of as many processes as we can. And oftentimes.

Profits and cash flow out of that happier customers flow out of that. So, uh, it's, it's, it's been pretty, pretty fruitful. So you can call that operations if you like, but that's often where we look.

[00:29:36] Doug McCormick: Yeah, Sean, I would say you know, a lot of our businesses are, you know, basic manufacturing or distribution businesses where.

You know, 50 percent of our cost of goods is material based. And so, you know, sourcing is something that you can very tangibly evaluate and you can underwrite that pretty effectively. Like we'll look at somebody's spend category and say, we think we can take out, you know, X percent and we're comfortable that that's something we can deliver in, you know, kind of 90 days post, post, uh, acquisition.

So those, those are always nice because they're very underwritable, very tangible. I would say the other the other area that I view is more of an offensive category, kind of like sales relates to investments in I. T. And really investments in I. T. are simply a vehicle to investments in data. And so I, I, I'm enamored by the saying, you know, data is the oil of today's economy.

Right? Like we think about what information does the company have to inform decision making? What information would we like to have? What's the investment to get there? And I think, you know, that's an investment that a lot of times you don't know the implications because you don't have. You don't have the answers yet, but it's a, it's a upfront investment that generally pays really high dividends over the course of ownership.

[00:30:44] Sean Mooney: Yeah, it's really, I like both those points. And one of the things is, is I'm looking under the hood here and what we get called for on, on diligence. And you think about the data intensity that's coming in one, it's, it's the, the, the sales funnel is a very statistically analyzable thing. And you can kind of map that forward under current processes.

And so we'll see people bring in kind of Salesforce effectiveness experts that can say, can you, can they do this? Or what are they gonna have to do to change it? Like, let's, let's just look at their funnel and take it all the way to cash to your point. The other thing that's really interesting in this kind of world that we live in today is, you know, the marketing and sales funnels have flipped.

And so it used to be 80 percent sales, 20 percent marketing. Now it's in, in many industries, if not most, it's 80 percent marketing and 20 percent sales. And so one of the really cool evolutions that we're seeing is that groups are bringing in digital marketing due diligence groups.

And it's particularly, I think, important when you have like a B2C opportunity or a mini B2B, but there's a whole world of, of competitive tension and terror in some places in, in the digital landscape of competition that don't get captured in any of the other traditional. Private equity products like commercial due diligence or voice of the customer.

Doug, the data point that you make is a really good one because these data sets are available in ways that they really never have been before. And we're seeing firms like yours really put, you know, kind of amazing usage of them.

[00:32:17] Doug McCormick: Not only availability, but cost to acquire, right? Like you know, the, the ROI on some of these it systems, ERP data analytics, I mean, it's, it's really compelling and getting better all the time.

[00:32:29] Sean Mooney: No, a hundred percent.

[00:32:30] Lloyd Metz: And, and also, uh, for, for many companies that allows the business to scale without sort of the typical relationship to head count a lot of these systems. Software is, is pretty powerful.

[00:32:45] Sean Mooney: So what about operations? So we've talked about sales. You're looking at the, at the, the top line of the income statement.

You're working your way down now and we get into the ops of the business. What are some of the places that you all look within operations? Say, you know, here might be some opportunity that hasn't been exposed.

[00:33:01] Lloyd Metz: Yeah. Doug, you want to take a, take a cut at that?

[00:33:05] Doug McCormick: Sure. So, so listen, I, I think, you know for us, I mentioned sourcing is a big element of operations, given that a lot of our cost of goods is, you know, purchased inputs in a distribution business. But, but it's actually much broader than that. So, like, you know we think about network optimization in terms of how we'll fulfilling to our customers.

We think about freight during the life cycle of the product inbound outbound. And then I think there's a whole discussion around. you know, quality and operating efficiencies. And I think they kind of go hand in hand in terms of like, what is the maturity of your manufacturing procedures that drives yield, that drives quality, that drives throughput, that drives utilization of equipment, time, etcetera.

And all those things are kind of interrelated. And I would tell you that when we think about operations we think a lot in the context of leadership and culture because like a lot of these things are you know, kind of organizational culture issues of what do leaders tolerate? What are the expectations amongst the employee team in terms of cleanliness in terms of orderliness, et cetera.

[00:34:09] Lloyd Metz: Yeah. I think that's right. Doug. And, and the other piece, Sean. Is is thinking about operations in terms of what's fundamental as some people like to say, go to first principles. If you were to, to provide this function or, or build this department or this company from scratch. On a clean sheet of paper, what would you have and what wouldn't you, or take it the other way, take the business as it is, and then figure out with improved processes.

Are these building blocks of the current operation still necessary, or still necessary to the same degree? Oftentimes operations and certain positions and functions are legacy from who knows how long ago in terms of how business was done. But now today in 2023, you may be able to execute on multiple functions.

Think, think, uh, accounting and posting entries to a general ledger, right? I've, I've won portfolio company. That's training basically, uh, a chat GPT, like element to do that. So you don't need a clerk to do that or, or several clerks to do that anymore. You can redeploy those, those people or that head count to something more important to the client experience, the customer experience.

And there's other examples I can touch on, but oftentimes. The operations is the result of whatever process you are still holding onto from the nineties

[00:35:39] Sean Mooney: a hundred percent. And I think those are both really spot on observations and it's interesting from the vantage here that we have looked at you know, like we so rarely get requests in due diligence for.

The procurement needs for the Lean Six Sigma groups, but whenever we do, it's free money and it and it gives people, you know, true alpha in a process because you're able to see things that no one else even knows about and it's usually like, I will do that later. Well, why not? Why not know that beforehand?

And it's, it's really the, the other area that I think is like a true opportunity is, you know, the, the, the manufacturing and industrial world is known about the value of process and lean six sigma and all these kind of elements. But the business services world, the, you know, the tech world starting to figure it out.

These same applications are incredibly value for valuable for those companies. And it's, it's been candidly one of the secrets to, to BluWave success is, you know, from day one, we've built a data and a tech business, like it's a Toyota production facility. And so you walk around our office, there are charts measuring every element of our process, every second, every element of quality, every speed.

And I've created a, incredibly neurotic company. No, I'm just kidding. It's done in the right way. But it's but there's so much opportunity to take the lessons learned from the industrial world to the business services world. And these same kind of tools can be brought into diligence. But other than, you know, what you all are talking about, you know, in doing it, there's so many others, unlike you all that don't do it.

And so,

[00:37:20] Doug McCormick: hey, Sean, I think you need to take a little growth capital from Lloyd and then he can tell you how much more you could do better.

[00:37:27] Sean Mooney: I'll hear right after this episode when I can do better.

[00:37:30] Lloyd Metz: So, so, so back to the beginning of the episode, right? Doug, it's the other way around, right? Sean wants to do way better and that's what makes him go find a capital partner to help him get there.

There you go. You want, you want the relationship between entrepreneur and capital partner where the entrepreneur's aspirations are pulling us forward. Yeah, that's great. As opposed to the capital sponsor pushing. Yeah. Right. It's subtle. I think maybe not so much, but that's the dynamic. I think you want, you want to get pulled forward by the entrepreneur's ambitions and conviction.

[00:38:11] Doug McCormick: No.

[00:38:12] Sean Mooney: Yeah. Yeah. Yeah. Sadly, I missed the window a year or two ago when I could have just said, give me money. And so maybe there's principles again.

[00:38:23] Doug McCormick: Maybe interest rates will be zero again soon.

[00:38:27] Sean Mooney: I'm going to time it. I've got five years from now put on my calendar.

[00:38:30] Doug McCormick: There you go.

[00:38:34] Lloyd Metz: I'm not holding my breath.

[00:38:37] Sean Mooney: I think we're going to have to wait two cycles from now for that level of madness to recur again.

So let's, let's, let's go down the, uh, keep on going down the income statement here. So what, what about IT? What are some ways that you look at within the tech stack of your companies? And Emily, you talked a little bit about this with digital automation. What are some of the things that you'd say, okay, here's some things that we can,

[00:38:58] Lloyd Metz: gosh you, you got me thinking about one of our portfolio companies where we brought in a new CEO.

And in the interview, he had a presentation deck talking about the tech stack and the different elements. That he thinks need to be addressed and how it needs to work and we're getting there actually COVID and quarantine kind of got in the way of that a little bit, but we're, we're executing on it again.

It allows you to capture data about your customers and clients and start to build more information around them. That helps drive your sales efforts helps drive your. Your, your product offering, you know, what you sell them and how you price it to them, it helps manage your understanding of that customer.

And therefore, how do you think about value? If you get that right, where am I over delivering value relative to what they're paying me? Right? So you can adjust your value proposition and therefore your cost of production and therefore your unit costs. So capturing that data and paying attention to it is pretty, pretty powerful.

I'm thinking about another portfolio company where we literally rebuilt kind of, uh, a shell, if you will, so their core information system, their core computing system was outdated, like eighties vintage type stuff, right? So presented a material enterprise risk, we got a bunch of folks, some freelancers included and rewrote the system effectively.

And so now it's more reliable. More scalable and get to the cloud and you don't have any key people risk because there's a limited number of folks who know how to program and language from the 80s. It's now written in a language that anybody in middle school and high school understands how to code and it's allowed the business to scale.

Make acquisitions in Europe, Asia, wherever they want, South America, and the integration of those acquisitions from an information systems IT perspective is seamless and easy. So it's an enabling, that's the term we use at ICV, it's an enabler for whether it's improved sales, improved customer experience, improved cost of delivery, it enables acquisitions, inorganic growth, so it's, uh, it's pretty powerful when you get it right.

But you got to figure that out up front. And in the particular case where we rewrote the system, we sniffed that out before our final bid. So we had already incorporated a lot of money in our, in our, in our transaction structure.

[00:41:54] Doug McCormick: Yeah, Sean, I can tell Lloyd knows a lot more about IT than I do. Um, so, so I'll give you a couple of just high level, high level reactions. First of all, like I think people say they can't afford to invest in IT. And I think it's almost the opposite. You can't afford not to. It's defensive and it's offensive.

It generally costs more than you think it's going to cost. And that's just part of the game. So it's very hard to stay on budget. It's been our experience. And I think a lot of times the, the IT and the technology is, is an important part of the solution, but it's a much broader issue than that.

So where I find you get in trouble is if you have immature processes, cause the IT is only as good as the processes of the people that are using it. So it's kind of like, how do I ensure I have maturity of process or consistency of process in the context of acquisition? And to me, like, anytime I see multiple IT systems, I feel like that's a real kind of red flag.

And for us, we've had good experience. Well we're, we're big fans of having mature process and do as little customization as possible relative to the IT solution. And if, and I say that in the context of, getting, getting to good quickly is, is probably better than getting to great, never. And customization is a really way, is a great way to get way over budget and take a lot longer than you thought.

[00:43:13] Sean Mooney: I think, I think those are, those are spot on, and the only things that I would add to what both of you shared is, is, and this is maybe adjacent to IT, but as you think about the tech stack, If any company does not have Power BI and Tableau and or something like Snowflake and they're not visualizing what they're doing huge opportunities reside within those companies because they don't know where they're in real time or even anywhere close to it and where they're not.

And so we're seeing all sorts of implementations. It's, it's interesting. And kind of the, after, uh, chat GPT changed the world, we started getting calls every day, like we want to do neural networks and we're like, uh, how about we organize your data first

[00:44:00] Lloyd Metz: and get a reasonable process, right?

[00:44:02] Sean Mooney: A hundred percent.

And it immediately went to process and data. And then we'll visualize it, and then you can analyze it, and then we'll put in the neural network. But before that, there's so much low hanging fruit. By just understanding where you're making money, where you're not visualizing it. So people can see it attaching a name to that person that is part of their process, part of the process they're involved with.

And then magic happens. It just immediately, they start doing something about it. You know, measure what matters.

[00:44:33] Lloyd Metz: Um, there, there, there is, there is a risk oftentimes in today's business world. People are so fixated on technology. They think the technology, the software, the next tool. Is the solution and, and I'm glad you mentioned the Toyota process, right?

That had no software technology behind it. And just following those steps can unlock a lot. Yeah, right. To Doug's point, it may not be the perfect optimal, super tech savvy solution, but it may get you halfway there. Just cleaning up your data, cleaning up your processes, cleaning up your work space, whatever it is, right?

So. anD if we, and I think that's, but that's not sexy, it's not, not super exciting to a lot of companies,

[00:45:17] Sean Mooney: but it can dance, you know, which is what matters. And, uh, and one, one of the other things I'll just say is we take a look forward, what's going to happen real quick. And this is going to be something that's going to be a societal issue that we have to cope with is that these GPTs, these LLMs.

They're going to, they're tremendous efficiency tools. This is a lot like 1996 right now, where it's, you know, when, when Netscape came out, everyone's like, Oh, your strategies, the internet. Now, the internet was an efficiency tool that made the distribution of information and goods and services more efficient.

These AI engines that are coming out are something that make human intellect processes of gathering synthesizing information just faster. And it's doing the same thing to people, but you still need a quote unquote co pilot. But what, what we're seeing in our business is that. And as we go into even our budgeting cycle, this, this following year is that that first level higher you don't need anymore.

People are getting your, our people across our entire team, get a robot that reports to them and we're seeing tremendous efficiency gains. Now, it doesn't, it doesn't mean like, just like that 1st person out of college that, that you can just let them go. Crazy. You got to, you know, they're going to give you a first draft and then you're going to mark it up.

And then even the next draft, and you're going to mark up a little bit and then you go, Oh, that's great. But meantime, that person, you know, instead of a, a 90, 000 person or a 50, 000 person or a 40, 000 person, they got a hundred dollars subscription. And, you know, we can, we can resist it, but that's, what's happening.

And, and so what'll be really interesting is how, how, you know, business leaders factor that into. Their lens into the future of these companies because it's here and, and you know, I, so I had everyone on our team reread who moved my cheese. Which is this great book if you guys read it and it's just because the world's changing and you can resist it or it's or not and so that'll be a big thing.

It'll have implications, but it's going to happen. I don't know what you, what you all think about that.

[00:47:21] Lloyd Metz: Well, Sean, I'm just glad you cleared that up because when you said this is like 1996 again, I thought you're going to start singing Macarena. I was, I was a little afraid for a second. So I

[00:47:31] Sean Mooney: danced it. You couldn't, you know, it's off camera.

[00:47:35] Doug McCormick: Hey, listen, I think it's a great point. And I think it, it redefines tech enablement, you know, like all of a sudden every business has the opportunity to embrace cutting edge technology in ways that can fundamentally change not only the business, but the value prop to the customer.

[00:47:53] Sean Mooney: So we'll get off this scary, uh, was it Skynet topic or whatever the movie was.

[00:47:59] Lloyd Metz: Terminator 2,

[00:48:00] Sean Mooney: there you go,

[00:48:02] Doug McCormick: whatever the movie was, come on,

[00:48:05] Sean Mooney: I'm just being coy. Let's talk about you know, go further down the income statement here and let's get to, you know, and I'll, maybe I'll bundle these together, your, your finance group and your M&A kind of opportunities. And, and they're kind of related, but separate, but maybe just for purposes of.

You know, it's often the office of the CFO that's critical involvement. How do you all look at those departments?

[00:48:28] Lloyd Metz: Well, since we're talking about movies, at least. I think the best CFOs that we've ever had are like the backseat and top gut, not the new one, the original one, right? They have all the gauges and dials and sensors and screens ahead of them to keep the CEO in the front seat, situationally aware and In our view, it's not just limited to financial or accounting, anything numerical.

So back to our conversation about data, anything numerical that relates to that business, a good CFO, in my opinion, has authority and purview to stick their nose in and understand and feed it back to sales, feed it back to ops, feed it back to whomever needs it. But data, that's their responsibility, not just the financial numbers.

[00:49:15] Sean Mooney: It's great. So talk to me goose. I like that. It's a good reference and our head of finance is going to ask me why I'm calling him goose all of a sudden. So Doug, how about you?

[00:49:26] Doug McCormick: I, uh, agree with Lloyd's take. I think the CFO is a, you know, business partner for the you know, leader of the, of the organization.

And yeah, I think as we're trying to drive value, we think about optimizing the business, right? So you're not just trying to grow it. You're trying to figure out how to be capital efficient or, you know, generate. You know, the best margin you can on, on the volumes. And I think that gets down to, you know, tight financial systems that can deliver information that is useful to the CEO and making, in making decisions.

And I think that's it's, it's a really a multidisciplinary skillset. It's not just, uh, accounting, it's, it's business acumen and it's the use being facile with data, manipulating data to come to conclusions. It's absolutely.

[00:50:14] Lloyd Metz: Yeah, if you're, if you're running ahead of budget and you think it's sustainable, the CFO should be able to talk to the CEO or any other functional leader and say, you know, that plan you had for the 4th quarter, you can accelerate it and pull it forward because we got the money to do it or whatever it is, right?

That's, that's the kind of collaboration and partnership that can make things really effective.

[00:50:39] Doug McCormick: Yeah, Lloyd, and I think it's important to acknowledge like the environment that the business is operating is just fundamentally different pre and post sponsor, right? You probably have leverage. You may not have had it before.

You probably are closing your P and L on a monthly basis because you have covenants, but also because people want to see progress. And as a founder own business, you may have closed, you know, when you did your taxes on an annual basis. So, so the, the, the responsibilities of this position have just gotten dramatically higher.

[00:51:07] Lloyd Metz: Yeah. Absolutely.

[00:51:08] Sean Mooney: I think it's, I think it's arguably the hardest job in the entire private equity ecosystem as being the CFO of a portfolio company. And, and probably the hardest leap to make for someone who hasn't been in that world yet. Because if you're at a founder owned company, you're really probably treated more like a controller where it's, you know, you need to accurately tell me what happened and, and, and not even like the why.

And then you get into private equity. It's, it's what happened, why it happened, what will happen? Why will that happen? And if something changes, how do we make that same thing happen? And you have to be analytical. And you have to be introverted, but you also have to be extroverted. Like your point, like you got to go around and talk with the entire company and then you've got to distribute the insights to everyone.

And so it's such a hard position. And that's probably why if, you know, if we look at our project demands, you know, the interim CFO request and the CFO recruiter requests are almost always at the top of our league tables because it's, it's, it's, it's a very, very difficult job, but those who can do it add incredible amounts of value.

. Okay. So the last big bucket that we haven't touched on yet. And one of the biggest, we talked a lot about this already, but you're looking at team, you're knowing what you have.

How do you think about what you need or what you could have on the team to supercharge this company?

[00:52:37] Doug McCormick: Yeah. I'll take a stab at that. Yeah. Yeah. So, so I think first of all, this relates to, we started the conversation saying that private equity is going to look at this in the context of what can the end state be in an unconstrained environment.

And so I think the team starts with that question of, you know, what am I trying to build? And then what are the resources required to manage that end state? So that, that would be 0. 1, 0. 2. Yeah, there's this, there's this whole narrative around private equity is cost cutters and private equity.

They try to take out you know, headcount as a, as a cost cutting opportunity. And I just think, you know, you get back to how the markets evolved. That couldn't be further from the truth of where most headcounts are going in, in the private equity context because, you know, we're paying prices that are premised on growth.

And so in general, we're aggressively adding to the team and we're trying to build the team. As early in the investment cycle as possible, so that the business can benefit from those skill sets and those capabilities, you know, for several years before we try to exit. And the last thing I would just say on, on this team issue is teams drive financial results, not the opposite.

And so as we think about where we're trying to go, you know, order number one, first principle, get the team in place and then give them the resources to kind of go execute against the end state you're, you've set out to accomplish.

[00:53:55] Lloyd Metz: And the only thing I'd add to that, Sean is, is oftentimes, uh, Doug, you probably have experiences to the founder entrepreneur is wearing a lot of different hats, playing a lot of different roles.

And again, part of that getting in their head exercises, what's their highest and best use, where do they have passion around and, you know, functions or hats 2, 3, 4, and 5, you got to let go and we'll go find really good people to do those roles. And let you focus your time and energy and passion around the things that you're excited about and good at and oftentimes we have to have that conversation to get folks open to bringing in talented individuals to do whatever the functions are that that they shouldn't be doing.

Be doing as the founder CEO entrepreneur,

[00:54:45] Sean Mooney: I think that's a great kind of,

[00:54:47] Lloyd Metz: oh, and by the way, and by the way, sometimes it's the other way around, right? Sometimes an entrepreneur is really good at a function and actually doesn't want to be CEO.

[00:54:57] Sean Mooney: That's a great point. I think so many cases we saw the kind of a, particularly if you think about the engineer who wants to just go back to the sandbox and create stuff.

Play, you know, in their mind, and then they suddenly have to manage people or, or the salesperson, you know, I think it's a really good point is you let them go back to what they used to love doing and, and Doug, I really liked your point as well that there's this misnotion, um, or misnomer that, that private equity is this 1980s wall street movie where you cut, you know, what we see from you all is you hire, you hire, you hire in part because maybe in the eighties, it was about optimizing a business.

But today you're transforming, so you need whole new skill sets. And so we looked in the, our data from the third quarter of 2023, when everyone was saying doom and gloom, we saw hiring activity increased by 30 percent year over year. And it's, it's crazy because, you know, in part, because I think you all are seeing the future before it unfolds.

But also because you're, you're, you know, you're Huge job creation engines. And so maybe in a subsequent, uh, document, we can talk about some analysis that we have done actually with, uh, including a call out and a shout out to HCI on, on the Inc 5000. But there's some really interesting data in there about how PE does in terms of job creation as well.

So I think we have a, a nice cherry on the top of this, This episode about how do you you know, how do you get dessert? Going forward and then maybe fully to get the dessert, you know on the table here is next episode let's talk about You, the company's good enough, you're going to make it even better.

And then you have to get it to an exit, or at least have confidence that you're going to have an exit before you, you buy the company. Is there a, is there a path, you know, to, to sell it to someone else ultimately who can be the next custodian? So great, great discussion here, gentlemen, Lloyd and Doug, thank you so much.

And we'll talk during the next episode.

[00:56:52] Doug McCormick: Awesome. Sean.

[00:56:53] Lloyd Metz: Thanks a lot, Sean. Thanks, Doug.

[Outro] 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. Learn more at hciequity.com. ICV Partners, an innovative private equity firm supporting management teams of leading companies at the lower end of the middle market.

Learn more at icvpartners.com. And finally, BluWave, the business builder's 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. Learn more about BluWave at bluwave.net. For further information on HCI, ICV, and BluWave and relevant topics discussed in the episode, please see the episode notes.

Sean Mooney: The views and opinions expressed in this program are those of the individuals and do not necessarily reflect the views or positions of any entities they represent. Moreover, no investment advice is given herein.