Private Equity's Unforgettable Tales: Lessons from the Trenches

[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. Hey guys, good to see you guys. Well, this is going to be another fun one. It's something that we've been talking about doing for a while Today we're going to open up the vault and we're going to bring some stories from yesteryear Which vault are you talking about?

[00:00:57] The Capone vault that was empty. No, this one's going to be Capone vault, but full today. What we're going to do is we're going to talk about some of the stories that had an impact on how we kind of view the world stories that we've experienced as you go through diligence, you're working with people and then trying to figure out how to.

[00:01:17] Overcome and or seize opportunity in terms of what are the morals of some of these stories? Does that sound like a good plan?

[00:01:23] Lloyd Metz: So, basically, you want us to talk about the crazy things that we come across in our private equity careers that we can't talk about, but we're about to talk about?

[00:01:34] Sean Mooney: But the identities will be shielded for purposes of maintaining the confidentiality of all these things, but we'll thematically touch some of these things, of course.

[00:01:44] Doug McCormick: Sounds like we're old. Sounds like we've got a lot of miles.

[00:01:47] Sean Mooney: Some might call it experience, some might call it character. These are the things that have made Lloyd and Doug who they are today for good and some might say bad. So let's go.

[00:01:57] Lloyd Metz: Got it. But where do you want to start? Goodness. There's a lot.

[00:02:01] Sean Mooney: This is a hot potato episode.

[00:02:03] So with that, I'm going to start with the picture of the person that I see first in our conversation here. And I'm going to throw that hot potato to Lloyd.

[00:02:11] Lloyd Metz: Oh, goodness. Ah, crazy stories from the diligence and career stuff. Let me start with the headline of All private equity firms and professionals should be doing background checks and real background checks with real firms.

[00:02:32] The cost is not as much as missing something can be, right? So do it the right way. I say that because I'm thinking now about a business that we pursued pretty aggressively, California based business. And fast growing founder backed. I mean, I think it was growing 15, 20 percent a year, sort of a consumer facing business, really nice business in a space that we knew about and had experience in.

[00:03:06] When we were down the road on diligence, we thought we were going to be able to submit the winning bid and final LOI or whatever, and we did our background check. And got again, a high level background check, not a super deep dive, but there was something odd in the founder CEO's background and involved police and arrest, and there was something just a bit odd about the fact pattern.

[00:03:37] So we pulled on the thread and told the background folks to go a bit deeper. And it turned out that the CEO founder was involved with meth labs.

[00:03:50] Sean Mooney: Whoa.

[00:03:51] Lloyd Metz: And I don't know if they were running the meth lab or own the meth lab or manage the meth lab. They were caught by law enforcement in a meth lab and there were weapons involved present in the room and had us slam on the brakes on that deal.

[00:04:13] We pulled up and backed out. We didn't tell the banker any of the specifics. We backed out of that one and dodged a real major problem. The sponsor that wound up making that investment, I don't think did very well at all.

[00:04:32] Sean Mooney: So Lloyd, I think I've heard of this story before, was the CEO, a former chemistry teacher who was in the carwash business?

[00:04:43] Lloyd Metz: No, John, this is not Breaking Bad. This is real life. I didn't know he opted in the store or something.

[00:04:49] Sean Mooney: I was like, no, no, I've seen this before. Carwash businesses are great. How did he screw that one up?

[00:04:55] Lloyd Metz: Car wash is actually pretty popular with private equity lately, but no, this is not breaking bad. CEO's name was not Walter and last name was not white.

[00:05:04] We were so, so thankful to dodge that one.

[00:05:08] Doug McCormick: Yeah. And I think to me, one of the things you're highlighting indirectly is just that some of the most important aspects of diligence are unrelated to the financials or the business characteristics and more about like, what is the team that I'm getting ready to.

[00:05:25] Develop a partnership with and so it sounds kind of hokey, but at the end of the day, one of the things that we do that I think is the closest to art is assessing people in terms of their values, their integrity. You often refer to this concept of grit as an important element of like, the diligence. And so I too find that we deal at ACI with what I'll call Main Street businesses that I think in many cases.

[00:05:52] Have large employee populations and are a microcosm of the communities that they exist in. And so you would expect to find a lot of challenging things related to like personnel, right? Whether it be addiction, whether it be civil or criminal paths, whether it be exaggerating resumes or personnel drama as You have people that are in a work environment that end up having relationships outside of that environment, et cetera.

[00:06:20] We've encountered family drama, family owned businesses where you've got significant issues amongst the family. And so I think to me, what is interesting is anybody that's been in the business a long time knows these things exist, but the sellers often Are afraid that by acknowledging these common things, they are somehow disadvantage in themselves.

[00:06:46] And I would say it's the exact opposite in terms of the implication where full disclosure or transparency up front diffuses most of these things. I think the meth lab is probably an exception, but a lot of the things that happen in a business environment, you know, we expect it to happen and what we need to manage is give us the information in a way that we can be constructive with it and get to the bottom of it and convince ourselves.

[00:07:12] It's not systemic. It's manageable in the right context, but I think people often feel unable to be that honest.

[00:07:19] Lloyd Metz: I think that's right. There is a lot of, in business, in what we do, people have egos, people have pride, so some of this engenders feelings of shame, right? And that's part of where the desire to hide or withhold some of this.

[00:07:39] Comes from, I think it reminds me of a CEO candidate that we interviewed once upon a time and on paper, they were great in the interview. They were great. The background and the experience were completely spot on for what we were looking for. Again, we did a bit of a background check and there was a police report involved, someone, the candidate was dating, filed an assault charge or assault and battery or something along those lines.

[00:08:14] We went deeper with the search, pulled on the thread, got some more facts and then had a sit down with the candidate and they were Almost 60. And they were quite embarrassed. You could see it on their face. They had been married for Decades had recently gotten divorced and had started dating again, and they came across somebody for lack of a better way of putting it, who was younger, hungrier, and looking for somebody with means to go take advantage of.

[00:08:51] And that's who they were dating, and this is how that person constructed a way to end the relationship. And the person was just mortified and embarrassed beyond belief. And I still remember that conversation to this day. It was hard for us to have with the candidate, but it was much harder for them to confess all of that.

[00:09:12] Doug McCormick: Yeah,

[00:09:12] Lloyd Metz: but I think you highlight,

[00:09:14] Doug McCormick: like, all the potentially challenging emotional dynamics around disclosing these things. What I find surprising is the number of folks who will actually agree to the background check, fill out a questionnaire, and omit things. They rarely, like, outright lie. It's more of an omission.

[00:09:35] What's fascinating to me is, it's like, That's almost the beginning of the point of no return, right? It's like if you disclose that and you're upfront about it and then you provide the information to do the background check, I think it's very manageable. It's that embarrassment that often has people convinced that it won't come up in the background check.

[00:09:54] And. There's no need to talk about it.

[00:09:56] Lloyd Metz: That's right.

[00:09:57] Doug McCormick: And I think that fundamentally then breeds a lack of trust and an inability to advocate for that situation because you've been surprised by it.

[00:10:06] Sean Mooney: Have either of you come up with kind of approaches to encourage people to say like, Hey, if you got something in your past that's a long time ago and you're past it, here's your opportunity to kind of Share before we find out.

[00:10:21] Doug McCormick: There's a great opportunity here to coach the test, right? It's like, Hey guys, there is no failure except failure.

[00:10:26] Lloyd Metz: Exactly.

[00:10:27] Doug McCormick: We're going to be pretty intrusive and go deep on this because this is an important part of our underwriting. So like, let's get it on the table. I try to be pretty open about, we don't expect perfection and we all have these kind of challenging parts of our lives.

[00:10:42] Sean Mooney: I think it's a great lesson for anyone looking to be involved in, in Really any kind of business, but a private equity business in particular, that's going to do a very thorough background check. Cause there's great sums of money at stake is you're so much better off just by flipping your cards face up.

[00:10:58] Don't think that it's going to get past you. And if you are, then you can have a conversation about like what you've learned about it. And how it made you a better person you are today, but if you try to hide it, the truth will come out. It just makes it all worse, and then there's no foundation for trust.

[00:11:16] It's a really good point that both of you make, and so often, people make mistakes. It doesn't define who they are for the rest of their lives. Sometimes people are just bad people, though.

[00:11:28] Lloyd Metz: Yeah, that is true. The one thing I will say, and I would be curious, Doug, if you've experienced this, is that I guess trying to be more self aware with more laps around the sun and the tenure and career, people look at us, look at their credentials, look at what we do, believe they understand who we are, but they sort of don't, right?

[00:11:50] And I think that also plays into this reluctance to be open, where I can speak for myself and my partners, we have big families from all over the place that span a range socioeconomically. and education levels, right? So some of the things that people are embarrassed about, they don't think we can relate to them.

[00:12:14] We frequently surprise those folks by saying, oh, I can totally relate to that. I got a friend, a classmate, a roommate, a neighbor, a cousin, a brother, whatever, who's gone through that, right? It just underscores your point about you got to disclose it.

[00:12:32] Doug McCormick: I totally agree. The things again, that I think many of these business owners encounter are reflective of the broader community.

[00:12:39] And we all have that in our everyday lives in different forms of fashion. So I think probably generally can relate. I try really hard to disaggregate like personal challenges versus risk to the And it gets back to this trust concept. I'd make that trust comment really tangible for a second. If you lose trust because someone's not been able to disclose an embarrassing situation, how do you then trust that person to reflect the accurate relationship they have with their largest customer?

[00:13:15] You know, so all of a sudden, everything that they say is in question. That's the really challenging aspect of this. And the other thing I'd say that I think my own thinking has evolved over time is, When you partner with people, I think in some ways it is an extension of your reputation. And so I think firms look at investments and partnerships in the context of reputation and reputational risk.

[00:13:40] And in some cases, like if there's a potential reputational risk, cause you don't trust somebody, I think many people just say life's too short, like lots of ways to make money. And if I can't trust that person, diminishes my ability to underwrite effectively. But I also don't want to risk firm reputational risk.

[00:13:57] And I think people bow out just for that alone.

[00:13:59] Lloyd Metz: Absolutely.

[00:14:01] Sean Mooney: I think like you all, I probably tend to like most people. And have a positive view on humanity. I think most people are somewhere in the range of good. There's some people on the tail that are really good. And, but there's also some people that are pretty bad and you are dealing with people where you're also talking about giving them great sums of money if something happens in a transaction.

[00:14:26] And that sometimes brings out the bad elements. Or maybe forces them to maybe try to hide an imperfection in their life. But it also sometimes inspires like some pretty bad people to do some things. Like a story I'll sell is like. I've always been kind of an idealistic Boy Scout type kid when I grew up, where I thought the world was inherently all good.

[00:14:48] And then you have these moments in life where you go, a lot of times the world isn't the way you want it to be, but it is the way it is, and you have to be aware of that. I had this one experience that I wasn't directly involved with, but I was involved with one of the firms I was in, and we had A gentleman that came to us and said, Hey, we want to partner with you and buy this family owned business.

[00:15:08] And he's like, I'm going to bring my own capital. You bring your capital, we'll buy it together. And kind of in the same way we brought in investigators, like we always do, just like, who are we doing business with here? And the person said that they were going to bring cash to the deal. And we go, okay, maybe that's just a choice of words.

[00:15:27] And as we dug into it, he's like, no, I'm really going to bring cash. Can I give you like cash? And can you put it into your accounts? What? Like stacks of cash? Like stacks of bills? Yeah, like, is this going to come in, is it going to be with like shrink wrap around it? And he literally said, yeah, well, where do you have this cash?

[00:15:47] He goes, oh, it's in the Caribbean. What? Caribbean? No way, right? And so even I was like, that's not right. This is real early in my career.

[00:16:00] Lloyd Metz: Hey, Sean, I actually think it's hilarious that you asked, where's the cash? Where do you keep it? Like, it actually matters, right? Do you

[00:16:06] Sean Mooney: keep it in bags? Or, like, do you come in with a submarine from Cuba?

[00:16:10] Like, where is this coming from? And sure enough, we did some work, like you said, pull the thread, and people all around this person had gotten into trouble. So we just said, pencils down, hands down, we're done. And we walked away, and then a couple years later, the owner of the business comes back to us and he's like, you know, that person, I didn't feel comfortable with, I think, for reasons we all appreciate, but I really like your approach.

[00:16:35] And so can we do a deal together? And so we went through all of the legal channels, all of our attorneys, make sure it was well past any kind of like, lockups. in the deal and we sure enough do the transaction with this owner who is a good person and then suddenly Walter White's cousin who you mentioned comes back and starts trying to sue us in like every strange small state court and just hopping from jury to jury.

[00:17:04] And at the end of the day, they finally find some really small court to take the case. And they rule because someone in the notes, the owner says, like, this firm is a really good partner. I like them. All these things that, Oh, this is now everything involved is under partnership law. And so like, there's an implied partnership with this person who is going to bring cash in from the Caribbean.

[00:17:28] And then suddenly there was just like huge judgment. It's like one of those shocking moments where you think like you've done everything ethical, everything moral, the right thing, get covers, but then sometimes people are just bad people. Suddenly we had to pay up. It was like one of the shocking things that happened to me as a young professional in my career that it may not be a large portion of humanity, but that portion exists and you have to be aware.

[00:17:54] 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.

[00:18:17] And 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. Now back to the episode. Doug, you ever run into Bad people, people who have bad acquaintances and associates.

[00:18:45] Doug McCormick: We have, and I think this gets back to this reputational risk issue. At some point, you've just got to be humble enough to acknowledge some of these kind of challenges you can't underwrite, right? So no matter how hard you work at it, no matter how hard you assess, you'll never get to absolute truth. And as soon as you get to that point, I just think you've got to bow out.

[00:19:05] Sean Mooney: It's the hardest thing ever because so often, you know, there's a great business opportunity. You just can't risk it when you have something that's well beyond an imperfection. I never used the word partnership anymore. No, thanks for that one. But it's like, these are, you know, you're going into something where it's really important to have that alignment.

[00:19:22] Doug McCormick: Fundamentally, I keep advocating for this concept of experience matters, and this is a game of repetition. But it really is because I think some of this, it's less about. The intellect of evaluating the business and more about have you done the work to convince yourself? Or have you established the relationship in a way that you have conviction in the integrity and the quality of the partnership?

[00:19:44] Sean Mooney: 100%. We could go on for days on these stories. The thing that I think is important for all of us to note is probably 90 percent of our stories are really good ones, 5 percent are edge, and 5 percent are really bad. So the vast majority are like good stuff.

[00:20:00] Doug McCormick: And before we move on from the humanity topic that we talked about, we highlight a lot of the challenging situations or things that come up that are hard to manage.

[00:20:08] I would just highlight the importance of this. In person interaction that drives the thinking around underwriting. So 10 years ago, every management presentation I went to was in person and there was lots of opportunity to do dinners before and after. There was a real emphasis on being there in person.

[00:20:30] And I think. Because of COVID and because of technology, there were periods there where we actually did one deal in Canada, where I never met the two entrepreneurs, and we had two of our individuals from the company who actually got through customs and figured out a way to do a meeting. And now I think people are kind of back into this more interaction.

[00:20:52] But you're thinking about selling your business, you're thinking about buying a business. This opportunity to interact in an informal environment. So important. You learn so much about people, good and bad, right? You learn about humility, humor, integrity, families, what motivates them. And so I find that part of the process really helpful and important.

[00:21:15] And also, I think it's a huge marketing opportunity for buyers, right? So I always feel like I am better positioned to be constructive with the entrepreneur if I've had the opportunity to have that informal kind of exchange. So like if we're serious about something, we're going to figure out a way to get on a plane and get face to face.

[00:21:34] Sean Mooney: I think that's 100 percent spot on point. And if you think about us. As even as a human species, we've been a tribal kind of species for thousands and thousands of years until we're broken into little digital boxes for a few and then getting back to those queues, those reads, how they treat people, how you interact with them.

[00:21:53] You can't underestimate that

[00:21:55] Doug McCormick: value. One of the things fascinating to me is if you have somebody give you a plant tour, I'm always interested in their observations and the way they tell the story, but I'm most interested in how the employees interact with that person as they walk the floor. Does the leader know the names?

[00:22:12] Does he know about their family and kids? Can he tell you how they relate? It's super interesting to just watch that interaction and to assess leadership content in that context.

[00:22:21] Lloyd Metz: Very true. Although even that can be gamed, Doug.

[00:22:27] Doug McCormick: You're such a cynic, Doug. You're such a

[00:22:30] Lloyd Metz: cynic. Generally, I'm not, but it can be gamed.

[00:22:34] Doug McCormick: Those weren't employees. They were paid actors. They were just there.

[00:22:37] Sean Mooney: Sure, it's happened before and it'll happen again. Now we turn the page, you're assessing companies, what are some of the other stories that come to mind where maybe something has come up in diligence related to the business itself? So Lloyd, what's maybe something that pops into your mind?

[00:22:55] Lloyd Metz: There's this one, there's a food company, nice business. A division of a larger corporation. So it was a corporate carve out, really liked it, negotiated good price, like the team, like the facility, like the leadership, and we were doing all the business diligence, this business had a. supplier in Japan for a pretty key ingredient to their product.

[00:23:23] And they had a contract, a supply agreement, a supply contract. And we wanted it extended, whatever, I think we asked for seven years, just for argument's sake. And so we did our work about the supplier, who the executives were. I went to a nice store, made sure we got gifts that were appropriate, in the blue box, we got cards, we got our whole gift bag as visitors and guests to this Japanese executive team.

[00:23:59] And it was literally planes to Tokyo, high speed train from Tokyo, got in a car, so planes, trains, and automobiles to go meet them. We meet them, we present ourselves, we present our company story, we present our gifts, they say thank you, we appreciate you coming out here, but we're not going to approve the deal.

[00:24:19] As a material supplier, they had consent rights to the change of control. And I looked at the banker, and I looked at my partner, and we both were like, what just happened? And that began the better part of 12 hours of discussions, then we go to our respective conference rooms, come back and have more conversations.

[00:24:44] And then dinner, and then karaoke, with whiskey involved, and after all of that we came away with a contract that was longer than we currently had, but not as long as we needed it to be, so we ultimately had to walk away from the deal, but that was a complete disaster. And when you think about it, with hindsight, the parent company that was selling the division to us, did not.

[00:25:13] Tell that Japanese supplier that they had been in business with for 30 years that this transaction was happening. That was an insult, an affront, and they were just flat out pissed. And we were the collateral damage, but nobody bothered to check in with them or communicate with them. And so that blew up the deal for us.

[00:25:35] Doug McCormick: You're onto an interesting topic here. So in the scheme of small worlds, like the chances of this coincidence is relatively small in my mind. In the early 2000s, I was involved in a corporate carve out of a Japanese parent, and we were buying the US subsidiary. But I have a very similar experience of an important part of the deal was an ongoing relationship with the former parent.

[00:26:01] And so went to Tokyo, got on the train, got in the car, and had a several day session with the team. And we actually had a really good experience, and it was very well received. Because the U. S. CEO understood the culture and understood that all along the way he was advocating for us and being overly communicative with parents.

[00:26:25] And so, Kind of like just how we were saying about disclosing challenging things on a personal side. This guy managed that dynamic very well I'm struck by how different business cultures can be across different countries and so we do a lot in Businesses that are sourcing from low cost countries. And so we've been buying things from China, Korea, et cetera.

[00:26:50] And I see that also there. And just, I think every culture is different in how they think about the overlap of business and relationships and what's acceptable, what's appropriate, what's not, and just being mindful of the U S paradigm is I think one that is effective and efficient. But not necessarily right, and can be very different from what you'll find abroad.

[00:27:15] Sean Mooney: Absolutely. With those kind of lessons learned, how has that informed how you kind of approach things now? When you get into these situations where maybe your spidey sense is

[00:27:26] Doug McCormick: going off a bit. To me, it's the golden rule of, like, overly communicative, and it's trying to be A listener and have humility about whatever that counterculture can be.

[00:27:38] If you're not careful, I think you can do things that come across as insensitive or offensive. Even one other thing I would say. about this topic that you brought up. To me, it's a really interesting challenge in our business, which is we do two to three months of work. You do all the legal diligence, all the financial diligence.

[00:27:58] And generally we stage at the very end customer calls and supplier calls because appropriately so the seller wants to make sure that they have a deal at a certain set of prices before they avail access to the customer. And so two things there, the first is it's interesting because In some ways you've done 90 percent of the work, but you have 30 percent of the answer until you visit the customer.

[00:28:25] If you have a large customer that has a material impact on the business, and it's hard not to get emotionally committed to the deal, right? Cause you've done all the work. You think it's checking out, you want it to check out, you want it to be there. And then you get in front of that customer and you could find out something dramatically different.

[00:28:41] And so I would encourage people to do that. Continue to be dispassionate about what the information is and how the diligence is going until you get to those foundational meetings. We do those for a reason. You really have the opportunity to learn important things. So I've been in a couple different customer meetings where one time a very large customer informed The business owner who was in the meeting with me that they were going to discontinue the contract in the meeting where we were supposed to get approval to do the deal and it wasn't because they were had bad service.

[00:29:13] It was because they were reorienting their logistics network and this service was no longer required. So nothing. This guy could have anticipated nothing. He could have done, but obviously good to know before we bought the business and then candidly, yeah. I've had two other experiences on this customer diligence.

[00:29:30] One is there are some companies like Walmart that say, as a matter of principle, we will never answer customer diligence because we don't want to incur liability and we don't want to be perceived as endorsing or not endorsing a specific supplier. So I think that's challenging and trying to understand if you have that dynamic embedded in your customer set is an important thing to figure out.

[00:29:53] And then candidly, I've had customers just misrepresent. The relationship. And so I would say, even though I've done customer calls, I'm a big fan of going them in person. You still don't always get the right answer and the right answer being commentary that's reflective of the future opportunity.

[00:30:12] Lloyd Metz: So Doug, it sounds like in the third case, sometimes customers will tell you what they think you want to hear.

[00:30:20] Right. And not necessarily what you want to know. Right.

[00:30:23] Doug McCormick: Yeah. And I'll give you a little more context. I don't know the motivation. We were actually buying a business that was owned by an estate, founder had passed away. The proceeds were obviously going to the family. They had a long term customer relationship and we had a meeting where it was portrayed to us that there was good long term opportunity and I think within six months, the customer ended up going a different direction and I think it's possible that the left hand wasn't talking to right hand within the customer.

[00:30:55] That's possible. That's possible. I think it's possible that the customer felt motivated to do well by the former founder who they had a personal relationship with. I don't really know the motives, but I know the conversation was inconsistent with the reality.

[00:31:09] Sean Mooney: It's real interesting on customer calls. One of the big reasons we get calls from PE firms is they want to have a third party do the customer calls instead of themselves.

[00:31:20] I was curious, like, why are we getting so many of these? Cause I would usually do the customer calls myself when I was on your side. Cause I like, I want to get it. I would ask a number of the firms who were like. Why do you do that versus yourselves? I go, well, what we've found is time and time again, if there's like a neutral intermediary in there asking the questions, we just get so much more forthcoming answers because they don't feel like they said, like they want to like keep the buyer happy because they don't know, and it's almost like it just releases this tension and veil.

[00:31:51] And they just kind of tell you the truth. And so that's something, as you think about for people who are doing acquisitions, Having a third party, and it's really not that expensive to do it. It can make a big difference in getting kind of like the straight answer.

[00:32:05] Doug McCormick: And how do you position that third party meeting?

[00:32:09] Is it a customer survey? Is it,

[00:32:11] Sean Mooney: it's usually calls and usually the cover story. And this is stuff that when we would do these, I did too, is like, usually the company that is being called is taking on quote unquote growth equity. So you can preserve the confidentiality growth equity is not offensive.

[00:32:28] Versus a buyout, which can sometimes be more sensitive and they're usually introduced by the company that's raising capital or selling under the guise of this is a growth capital survey, but we always, we slash the world, we, the company that's doing the customer calls picks the customers and that's really important because obviously the seller is going to pick their best customers who are the coziest.

[00:32:56] So if you have the integrity, like we want to talk to customer A, B, C, F, hr, and then what we would usually do is say, you know, whether this deal moves back and forward. And what we see others do is like, we'll give you the readout from the customer calls so you can see it and get something valuable as well.

[00:33:12] Doug McCormick: I totally agree. My only comment, you say this a lot, it's not, or it's both. Especially like you have six or seven customers that matter and you got one that really matters. And so you do five or six that are survey oriented and then you go see the big one.

[00:33:28] Lloyd Metz: That's right.

[00:33:29] Sean Mooney: Well, Tia, but another story here. So Doug, your firm, you do lots of carve outs, add ons, all these sorts of things.

[00:33:38] That's got to be a treasure trove of some stories. What do you have in this

[00:33:41] Doug McCormick: category? So listen, some of this is premised on a strategy that embraces complexity, because I think in some cases, complexity creates opportunity and creates opportunity for compensation, right? And complexity can be a carve out.

[00:33:56] It can be being able to move with speed. We try to embrace that, but we try to be thoughtful about not creating complexity for complexity sake. And I would tell you, I think. Corporate carve outs are interesting for us for a couple of reasons. One, we have a relatively deep and capable operations team, and I think that allows us to manage some of the transition risks that are associated with corporate carve outs.

[00:34:20] But I also think corporations have different objectives that may not be simply maximizing value. And so a good example of that would be, we owned a business called TTM Technologies back in the late 90s, early 2000s. And in the middle of the tech meltdown, Honeywell was divesting a core asset. So Honeywell was the parent.

[00:34:45] Honeywell had bought a business called Johnson Matthey. And within Johnson Matthey, they had a non core asset. So you can imagine this is non core of an acquisition that is dramatically underperforming because of the dynamics around the tech sector. And on top of all of that, corporates are managing things like restructuring charges and realizing tax losses.

[00:35:09] And so they had a situation where they were very motivated to get something done by calendar year end. And so we did a very expedited deal, bought a lot of assets in less than two months, closed by year end, and basically paid a dollar for the business because it had to be due consideration. It was one of those things where on the face of it, the deal looks so good.

[00:35:35] Our investment committee was actually challenging. Like, how does this exist? It's like the efficient markets theory where people say the dollar couldn't be on the ground because someone would have picked it up. And I think that ended up being a really good transaction for the seller because they accomplished their corporate objectives and it was a good outcome for us.

[00:35:55] Because we could integrate those assets into a broader company, and I think it was a great outcome for the employees. So, like it was a win win win, was only accomplished because we could deal with the complexity under an accelerated timeline. And so I think those kind of examples are interesting. I also think being willing to embrace the art of the possible is an interesting way to think about deals.

[00:36:21] We have one where we were ready to go to market soon. We encountered an ad on acquisition. We thought that was very accretive to our thesis. So we engaged with that entrepreneur to buy his business while that was under letter of intent, we got solicited at a very attractive value. By another corporate buyer.

[00:36:45] And so ultimately we navigated closing our transaction on the same day that we purchased the add on. And the funny part of the story is we didn't know this, but the business that bought us was sold a month later. And so we essentially had three businesses in play all at the same time and lots of risk to execution around that, but at the same time, those acquisitions were so compelling.

[00:37:09] That it was one of the drivers of the rationale, I think, for each of the actors in that scenario. So, I guess, long winded way of saying the deal market is dynamic and being able to think through the multiple decision points on how to navigate those opportunities, I think, can create real value.

[00:37:30] Sean Mooney: I've been involved with a few carve outs over time, but not nearly as many as you, and they're just so complex because you have the complexity of a surgery.

[00:37:40] You have to then stand these companies back up and usually there's a lot of time pressure on them. How do you manage that? It's moving very quickly, but just slowing it down so that you can have clarity of thought when you're going through this kind of multidimensional chess game that's playing out in real life.

[00:37:55] Are you

[00:37:55] Doug McCormick: thinking about it in the context of getting the deal done or executing the integration or both?

[00:38:01] Sean Mooney: I think it's getting the deal done and then executing it. It all happens like at the same time really quickly. I always find it just so daunting versus a normal transaction where you have a platform and the company is what it was after the wires are released and you close, but this is something where it's like, there's an extraction, there's an integration, there's a transition services.

[00:38:24] There's all this stuff. Like, how do you manage all that stuff where you can execute?

[00:38:28] Doug McCormick: Yeah, it's a great question. I started out by saying that we believe that sometimes you can get compensated for complexity. What I'm really saying by that is we think we've picked a price that is good enough to compensate us for all the complexity and all the noise that you're talking about.

[00:38:44] That's the starting premise that we think we've really got good value. And I would say, as I think about like the situations where we've dealt like this, I think at least 80 percent of the transactions we have been a strategic. Right. So we had a platform where we're buying select assets in a carve out.

[00:39:02] And I think the degrees of freedom to go effectively integrate and drive value are just so much better. And it's just a much harder, much longer transition period that I think you have if you're buying a standalone. Those circumstances are different and harder to have the combination of value and synergies to make it really compelling.

[00:39:22] Sean Mooney: And that's a really good point because you're starting with a platform. You have the resources resident. I guess maybe my next level of curiosity on this is like, how do you motivate the people at your platform? Cause they're doing their day job and now they have a night job in an early morning job to do all of this, like lightning fast.

[00:39:43] Doug McCormick: Well, I think it's a great question. The senior team, you can find ways for them to carve out headspace to really focus on this. Broadly, I think this is a great opportunity for external resources. So, you know, our view is you get the deal done, you set up an independent kind of war room. That is 24 seven focused on five or six different work streams.

[00:40:05] So how do I get payroll transition and employees on board? And how do I get it integrated? There's a very precise planning program that happens with this. And I would say like, honestly, the outlining, the detailed integration plan, I think is the longer gating item. Then the diligence in many cases, cause you know, the business, you know, the customers, you know, the value prop, you know, you're buying, you're getting compensated because it's a relatively good price.

[00:40:31] And I'm most worried about how do I own this business day one and not piss off my customers or my employees because I didn't execute well on the integration. That's where we're really trying to spend a lot of time and it's money well spent to bring in outsiders to help you like break the back of that bookstream.

[00:40:48] Sean Mooney: A thousand percent. That's the whole adage we share a lot here. It's like failing to plan is planning to fail that work up front pays dividends.

[00:40:57] Doug McCormick: It's a classic. This is a one time surge of activity that once you get it done correctly, it goes away. So why would you try to burden your team with that? And why would you build that capacity internally just pay for the outside support?

[00:41:11] Sean Mooney: That's just true in the data that we have from project demand where regularly one of the top 10 use cases we get is merger integration groups support and to your point is There's some really capable groups there if you add that up As a portion of the entire acquisition cost, it's like chips, but the ROI is massive.

[00:41:31] And so for those of you thinking about doing particularly one of your earlier rounds of acquisitions or add ons, this is money well, well spent because, uh, most of the add ons I did one plus one, if we got the two, we were like, thank you, God, one plus one was one and a half. And I think what you're articulating is like, how does one plus one equal three is what you thought you were going to get.

[00:41:55] Totally. And I guess the only story I'll add to the mix is kind of in the same carve out genre, but also you may be building on Doug, your point of like part of the art of what you all do so well is it's managing risk, but viewing the lens like of opportunity in an unbounded way. I think so often people just say like glass half empty, what could go wrong, but what you've articulated is.

[00:42:20] But yeah, what could go right? Opportunities create themselves. We had an, this was a carveout, which was not our usual thing, but it was like such a great opportunities and kind of an orphan within a large international strategic. And I'll be generic. It was an equipment manufacturer that kind of owned this small corner of the world and what the equipment was used to do.

[00:42:47] And the large corporate needed, uh, it's that traditional cycle where they. Do add ons and then the economy softens and then they got to clean things up and to get rid of all the extraneous stuff. We were beneficiaries that we came into it. And so we were the prevailer and auction process against a range of strategics.

[00:43:04] It was an area that we specialized in. One of the strategics that had kind of an affiliation with a direct one going back like many decades ago was a key supplier of a key component of this equipment. And they decided they weren't happy about it. So they came in and they basically said, we're pulling all the supply or we're going to like triple the cost.

[00:43:26] And the other big strategic got really pissed. So it was interesting first to see these titans, very large strategics over this little asset, just clashing and bashing each other. And the one strategic that was selling came to us like those bleep bleep bleeps were never selling to them. So you are going to do it, but you just have to figure out how to do it without that component.

[00:43:50] Like, uh, but that's like the most important part of that thing that we're buying. And they're like, well, we'll give you some time to figure it out. But nowhere we saw to those people that are using things where it's like tortuous interference and like all this kind of stuff. And so we're like, all right, well, let's find a way.

[00:44:08] So we just put a war room together. We hired engineers, you know, that we knew and said, all right, we're going to develop, we've got four weeks to figure out if we can develop this thing internally. And so we had teams working 24, seven, trying to figure out if we can have a plausible design. And then at the end of four weeks, like we can do it, but it's going to take us six months to be able to start producing this thing.

[00:44:32] And so what we had to do then is go to this other really mean strategic and say, all right, we're going to do it eight months by. And. All lawyers like you can't tortuously inferior, but they still is this crazy price. The other strategic said, well, we'll work with you on purchase price to compensate for where you have to pay for this thing.

[00:44:49] And then what we had to go, he said, okay, so we struck a deal and we knew we had really six months to get this thing made, worked, integrated, validated by customers. And it was like pretty much daily meetings for six months while we were finishing the design work, making the component, proving it out, validating it, because these were very highly essential equipment used in processes.

[00:45:15] I'm trying to be a little bit vague here and long story long, you know, this was like the moon shot and somehow we made it to the moon. We got it. We were producing it. It was probably one of the bigger like risks that we had probably collectively taken in our career. And the long story very long is then we got at work and we did all these great things.

[00:45:35] We turned this kind of small business into own this neighborhood. And then happiest day of this whole story was years later, we were then able to compel that same strategic that tried to like double tap us and put us down. We sold it to them in a double digit EBITDA multiple pay through the roof for it.

[00:45:59] And it turned out well, but it was. One of the many reasons why the only hair I have left is gray.

[00:46:06] Doug McCormick: It's so funny. There's two kinds of like integration risk broadly. Like I've seen kind of, you've described where there's an engineering problem or new product introduction challenge, or there's like all the blocking and tackling about how you combine the organization.

[00:46:25] And I've done way more of the latter. And I've done one or two of this new product introduction. The new product introduction scares me so bad. And the reason is because it seems so binary and it's inconsistent with my own skillset. Like I can look at the other stuff, I click on it and I can kind of understand what has to happen and where the risks reside.

[00:46:46] And I see this innovation side, the R and D side, and it just seems like so imprecise and like, You think you're on the 10 yard line until someone tells you you're not, and it's very hard to predict, so I, I've struggled with those kind of bets, but when they work, they really work well.

[00:47:04] Sean Mooney: Yeah, and this was one, I think the only way we were able to get comfortable is we had some really good engineering resources that we were to bring in.

[00:47:11] This is an area that we specialized in. We had subject matter expertise. And we are able to get a very high degree of confidence that we could do this And had enough margin for error built into the supply deal that we thought we could pull it off And there was enough I think collective social responsibility if you will If something went wrong, we had some very important customers That other strategic would have gotten in a lot of trouble if they didn't sell us a few more if we needed them.

[00:47:41] But it was a white knuckler the entire time, but you and Lloyd, that's your job, right? That's what you do is like view the world through opportunity and then figure out how to make it happen with a lot of confidence and then find that 25th hour in the day that goes there. So we've talked about maybe doing another one of these episodes where we do best but never final after dark and we equip the stories with whiskey.

[00:48:08] And so those stories will be even better, but I thought these ones were pretty good.

[00:48:12] Doug McCormick: This was fun.

[00:48:13] Sean Mooney: All righty. Well, Lloyd and Doug, thanks so much. It was great. Once again, catching up.

[00:48:19] Lloyd Metz: Thanks a lot, Sean.

[00:48:20] Doug McCormick: Good talking guys. Thank you. 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.

[00:48:37] Services and distribution companies. Learn more at hciequity. com ICV partners, an innovative lower middle market, private equity firm, supporting management teams of leading companies at the lower end of the middle market. Learn more about ICV at 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.

[00:49:11] Learn more about BluWave at BluWave. net. For further information on HCI, ICV and BluWave and relevant topics discussed here in the episode, visit Please see the episode notes for links.

[00:49:25] 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.

[00:49:36] No representations, warranties, financial, legal, tax, or other advisor 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.