The Keys to Effective Merger Integration in Private Equity

[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.

[00:00:37] Sean Mooney: It is great to be back with Lloyd and Doug. Doug and Lloyd, how are you guys?

[00:00:42] Lloyd Metz: Hey Sean. Hey Doug. Good to be back.

[00:00:45] Doug McCormick: Good to see you guys again.

[00:00:47] Sean Mooney: It's been too long. I missed you guys and I said, you know, if I could get Lloyd and Doug together, what would I want to talk about? If there was anything in the world that I could ask you guys on, and what came to mind was merger integration.

[00:01:01] Lloyd Metz: Uh, I thought you were gonna go with favorite eighties movies, but guess I would've got that wrong.

[00:01:06] Sean Mooney: This is welcome to my world. This is what I think about.

[00:01:08] It's like not this existential stuff. I don't wanna be alone with my thoughts too often, and so I have to keep it like on the level.

[00:01:17] Doug McCormick: You burden us with your thoughts.

[00:01:18] Good, good.

[00:01:19] Sean Mooney: Exactly right. It's like, and if I don't get it outta my head, then I gotta turn on that Headspace app and it's just a mess. So help me. Of get these thoughts out and, and the things that I really think about late at night, like merger integration. But I do think it's an important topic because pe if you look at the data, I was looking at the PitchBook data last year and overall kind of the platform world still continues to be slow, but what's still really busy is add-ons.

[00:01:46] And so I think anyone in the private equity business, this is a kind of standard operating procedures. You have to build multiple ways. Also, this is a way to kind of activate your strategies in light of maybe what's still kind of a slower platform deal market. So I think this is really relevant for whether you're a private equity investor, a portfolio company leader, or even someone that's getting acquired.

[00:02:10] So I think it'd be a great topic. What do you think?

[00:02:13] Lloyd Metz: Yeah, I agree. Cited PitchBook. There are so many firms, and Doug, you're at one of. Buy and build add on acquisitions are a critical key part of their investment strategy and the returns when it works can be 3, 4, 5, 6 plus x, right? If you get it right, but then you also have a lot of history and stories of platforms buy and builds rollups.

[00:02:41] They go by variety of names that went off the rails and flamed out. So I think it's actually a really good topic. Sean, so thanks for thinking about it.

[00:02:52] Doug McCormick: Yeah, Sean, and before we dive into it, I think just one other comment about a statement you made, which is in a environment where there's not a lot of deal activity, a preponderance of the deals are kind of in the context of add-on acquisitions or mergers, and I think that's interesting in in the following ways.

[00:03:09] In a choppy market, I think strategics that are financially backed. Have more degrees of freedom to get things done. They can find value where others maybe can't because they can avail themselves to synergies. And you have a really capable buyer that knows the market, understands the long-term strategy.

[00:03:27] And if you're a private equity firm, it's actually can be a really interesting time to kind of dollar cost average. Right. And so as you're thinking about where you are in the lifecycle of the investment, choppy markets present, um, interesting opportunities.

[00:03:41] Sean Mooney: I think that's another great point. It adds value in multiple ways.

[00:03:44] And so if we jump into it, let's kind of set the foundation of the conversation for those maybe who weren't as familiar with kind of these add-on levers. And so Lloyd, do you want to maybe just kick us off by sharing what is merger and integration? What does it mean? Why is it important?

[00:04:05] Lloyd Metz: Well, I guess use merger and and acquisition kind of interchangeably for this conversation.

[00:04:10] But when a company is acquiring another company, and generally it'll be smaller, how much smaller, I guess we'll tease out in the conversation, but you gotta figure out everything from payroll and withholding taxes for employees to stationary and branding and everything that touches the customer.

[00:04:34] Getting all of. SKUs and products loaded into the system so you don't mess up billing with your customers. There, there's a whole litany of things that you need to get right. Reporting, organization design, who reports to whom? Who's gonna be whose boss? Do you keep people? Do you not keep people? There's a lot to think about when you're, when you're making these acquisitions and integrating them properly so that you can become an organization of one that moves as one as opposed to.

[00:05:04] Legacy organization, legacy company that just got bought and you don't really coordinate or integrate with the company that bought you.

[00:05:14] Sean Mooney: I think that makes a lot of sense. And what happens if you do it well?

[00:05:19] Lloyd Metz: Well, if you do it well, I mean, go ahead Doug. I'd love to hear your thoughts on what happens when it, when it goes right.

[00:05:28] Doug McCormick: I think first and foremost, Lloyd, you nailed it very simplistically. Integration is about. Operating as one. When you think about the goal of these acquisitions, generally it's because you've acquired a new set of capabilities, and so the challenge is finding a ways to operate as one and keeping the best of both businesses in a way that you've upskilled across the entire organization.

[00:05:55] And I think people often think about integration as this like period right after you do a deal. And I would argue it's much more holistic than that. Good integration starts well before the deal gets done in our mind. The integration planning starts simultaneously with the diligence that allows you to get the deal done because you're not only validating the premise of why you want to own the business, but you're developing a very detailed plan about how you're gonna allow these organizations to work together effectively.

[00:06:26] So you've got the pre-planning, you've got like the period right after the acquisition, which is a very high risk period. The importance of stability there I think is critical. And then you've got like long-term integration and some of these work streams in complicated things that we'll talk about. Like it can take 24 months to begin to really fully realize the benefits of the combination.

[00:06:49] Sean Mooney: That's so true, and as I would think about it when I was doing kind of add-ons, it's just in my model. One plus one would equal three. 'cause you're like, you're gonna get this joint benefit on it. And almost invariably, and this is kind of earlier days of pe, if I got to one plus one equals two, I was like, thank God.

[00:07:09] And so, so what happens when it doesn't go well? Just kind of headlines and we'll go through into each of these kind of major facets in more detail. But like what's the big headline? If it doesn't go well, what's the downside to these things?

[00:07:22] Doug McCormick: I think we have to acknowledge the deal dynamics are different.

[00:07:24] Like Lloyd and I. Generally our buying business is where the owner's reinvesting significantly, and there's great continuity and alignment with management teams and in add-on acquisitions, you don't always necessarily have that. So I think it's a period where the business is fragile because you've got potential turnover with senior leaders, and if you haven't articulated a clear strategy about how they're gonna fit into the organization, that can be very disruptive with the customers.

[00:07:55] Sean Mooney: So you can create tremendous value with these acquisitions when they're integrated well. But you could also destroy value if you mess it up. That's just something that I think anyone getting into this game has to fully appreciate. It can be hugely value creative, but it can also cause a bit of trouble.

[00:08:11] And so maybe let's go through, in kind of a, a lightning roundish, what are some of the things. That you need to do to have the outcome equal one plus one greater than two. And so maybe, Doug, why don't you kick us off?

[00:08:28] Doug McCormick: I think the first thing that I would encourage people to think about when they think about integration is I think it's different for almost every business and every acquisition.

[00:08:37] And so I think there's a standard process or way to think about integration, but I think it manifests itself differently. In each circumstance. And so there is not in my mind a cookie cutter approach because it depends on the premise of the acquisition. Am I buying this business because I want a new geography that could be relatively isolated from the rest of the business?

[00:08:58] Well, then there may not be heavy integration in that situation. Am I doing it because I have a cross-selling opportunity with new product set that has a different integration plan? And then the third very common one is, am I doing it to advantage myself from a cost position perspective? Which has a different integration plan.

[00:09:14] So I think you gotta get real conviction in the premise of the synergies. Here is what product expansion, geographic expansion, cost position, and that kind of drives the kinds of integration activities that you're gonna drive toward. At a very high level, we think about the integrations activities are required, are very different by business model.

[00:09:38] For example, we spend a lot of time in three business models. One is distribution, one is basic manufacturing. The third is technical services. And those business models have very different needs and the complexity associated with realizing synergies in a distribution business, which are hard, but the synergies are of real size, are very different than the synergies that we would expect to realize in a technical services business.

[00:10:05] Pretty light integration, not as much synergy, but also a lot less risk. And so I think getting grounded in the challenges associated with the different types of businesses that you may be investing in. And lastly, I think those challenges or those business model attributes impact the likely size of the acquisition, the velocity at with which you can do them.

[00:10:29] For example, in distribution, I. Good acquisitions with really, really small add-ons because the integration lift is heavy relative to the size of the business. So we target bigger assets with meteor activities, but lots of payoff. And in technical services, we often do very high velocity consolidations where we'll do deal a month.

[00:10:54] These are relatively small deals, relatively simple integrations, and so we have a different model prosecute that kind of circumstance.

[00:11:02] Sean Mooney: I think very well said. Maybe there's some common premises, but each one of these businesses are different and you gotta look at the situations uniquely. And if you just think of orange as an orange, when there's a lot of apples out there, you can get in trouble.

[00:11:15] How about you, Lloyd? What's one of the other things?

[00:11:17] Lloyd Metz: Doug touched on this earlier, but preparing in advance is super critical. Don't forget your premise, as Doug just said, of why you're buying the business or why you wanna buy the business or the benefits. But you also need to think about what's a successful integration look like?

[00:11:35] What do you want the organization to look like? What do you want the companies to look like? What do you want them to act like once you are integrated? Are you gonna keep it somewhat independent as it relates to the customer facing functions? Or are you trying to centralize that too and integrate that too?

[00:11:53] You have to think about these elements. It definitely comes out of good diligence, so you have to have a very thoughtful and specific diligence plan as well, so that your integration ideas are, you're not completely starting with a clean sheet of papers. You're going through diligence and learning things.

[00:12:12] You kind of think about what it might be. You should have a rough idea of what it might, and you're confirming or not confirming your decisions on integration as you're going through D. If that's what you want to call it for how the business should work going forward is critical. It's critical to have a view of that, if not in advance, maybe during diligence, you get it written up quickly or decided quickly.

[00:12:40] But like I said before, how will different processes work? The acquirer or the targets, brands, names, identities, business cards, all that stuff. Key functional areas, are they gonna stay at the target? Are they gonna be centralized? You need to make those calls. You need to sketch that all out and plan all that and get it going.

[00:13:01] And lastly, you also have to think about what are the metrics that you're gonna use to make sure things are working the way you expected.

[00:13:09] Sean Mooney: Another really good point, as old Ben Franklin once said, right, it's a failing to prepare. It's preparing to fail. So like this stuff takes hard work and it has to be thoughtful and it has to be done.

[00:13:20] In advance.

[00:13:24] Lloyd Metz: This episode is brought to you by HCI Equity Partners, a lower middle market private equity firm, focused on partnering with family and founder owned manufacturing service and distribution companies, ICV partners. An innovative private equity firm supporting management teams of leading companies at the lower end of the middle market and BluWave, 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.

[00:14:00] And value creation needs. Now back to the episode.

[00:14:07] So question for you May, maybe, Doug, you can shed some light on it. When you're starting off as a relatively small company and you have aspirations to acquire, so Sean's point, who's gonna do all that work? Is that a capability that you need to build internally or is that. Something that the private equity sponsor brings in the early stages, and then as you execute, you build that capability internally.

[00:14:33] Just curious how to get started.

[00:14:36] Doug McCormick: It's daunting, and I think this is in our market, like truly lower middle market. I think this is the hardest part of the execution phase because you start out with a big vision, some capital, and probably a relatively small toehold. Like you've got a base business and I, I don't even think, sometimes we buy platforms.

[00:14:59] We buy a business that happens to be our first acquisition, but it doesn't necessarily have the capabilities of a platform. And so we have a view of what we're trying to build, both in terms of the end state that we wanna sell to another buyer, but also the capabilities that are required to acquire and integrate.

[00:15:19] We are trying to leverage the team that we partnered with to start as our base business. We're doing all of the m and a and we hope to build that capability resident in the business when it gets of scale. And we are playing quarterback on integration with a lot of outsourced resources and management teamwork to kind of coordinate.

[00:15:42] And that can be anywhere from, in some cases, on some of these heavy lift deals. We set up a war room that exists for a period of six months where we, we've actually got full-time people staffing that to pretty light integration where you can do it with the team that resides there and they can still keep the rest of the business running.

[00:16:01] Sean Mooney: One thing I'd add as well to that for Doug, for your firms, where that's a real core competency, right? You know, this business. I think the other thing I would add out there for maybe for either private companies are doing an acquisition for the first time or. Even a PE-backed company where that's not something that's so built into the DNA is we see a lot of people who come to us for merger integration or acquisition integration support, where that's all they do.

[00:16:30] And in some ways, a lot of times where it's not part of the core DNA that I wish I would do. And in my prior days, you're like, all right, CFO, you're now an integration person. And they're like, uh, I've never done a, an acquisition before. I'm like. Good luck, but it's really helpful to bring in one of these groups on the first acquisition.

[00:16:48] 'cause they give this team like the full playbook and then you got like, then the second and the third and the fourth. You're kind of like dusting off the cover. And so that's another kind of approach that I think a lot of companies can use to teach them that when you don't have the skills in kind of like that died in the wool understanding

[00:17:08] Doug McCormick: of how to do it well.

[00:17:09] Like your firm does, Doug. And a couple reactions to that. I think there are some ways to mitigate that risk early on in that phase. So we often over equitize our platforms so that we're not worried about financial covenants. And I think there's a real kind of balance between remaining disciplined on ensuring that the base business performs versus the infrastructure that you must invest to position the business to grow.

[00:17:33] It's almost like the airplane that takes off from the aircraft carrier. It gets off the edge of the boat and then dips a little bit. We often see that. And Sean, maybe if I could just back up a second. We're talking a lot about integration, but there's a really, in my mind, interesting financial implication to what you're building here.

[00:17:50] And we look at m and a as simply another form of growth, just like organic growth. And if you get good at it where you can demonstrate, you can repeatedly do it on an accretive basis. Other buyers will underwrite. Market growth, your organic growth and your acquisition growth. Acquisition growth is way more expensive generally, but it's another avenue for growth and I think you can get paid substantially for that as an under writeable go forward

[00:18:19] Sean Mooney: expectation.

[00:18:20] It creates long-term, not only in the present acquisition, but it's the 10 year plan stuff that really shines through.

[00:18:27] Doug McCormick: And as a result of that, like when we try to sell a business that has been acquisitive, we don't forecast the business organically. We say we're gonna underwrite 10 million of acquired EBITDA on a per annum basis, and in five years you will have grown 8% per annum and you will have grown through acquisition at X percent per annum.

[00:18:47] And, and I think that's the forecast that I think people stress test, but they generally

[00:18:52] Sean Mooney: buy that from the strategic standpoint. That's something I wasn't thinking about, but it's a great thing to put in there. It's not only can you. Get comfortable with more tactical kind of one plus ones equal threes, but then it's a really an engine that you're building that's as strategic as any of your products.

[00:19:09] And as you think about kind of enacting that engine, one of the things that you were talking a little bit earlier is like we've talked earlier, you gotta do this thing very purposely and in terms to get it well, how do you think about even just assigning responsibilities as part of building that engine?

[00:19:26] Doug McCormick: Some of this I think, is. Manager and personality dependent In general, I would say it's often a lost opportunity. If your integration team isn't a true team and not one individual, it ultimately the buck stops with the CEO. But the planning should be very collaborative in ways that you can kind of figure out which organization does things the best, if you will.

[00:19:52] And that does a couple things. It gets people aligned. It gets people bought into what we're gonna do so they have a chance to express their opinions. So a lot of this is basic change management, but it's critical. And I think the other thing it does is it begins to establish credibility amongst the different teams.

[00:20:10] And then you've gotta have people assigned to be responsible for whatever that activity is. And the same way we try to manage business with KPIs in terms of how the organic business is performing. We try to have KPIs around the progress on integration, right? So what can we report out? What was the end state we expected at a certain timeline and where are we tracking against that?

[00:20:36] Sean Mooney: I wanna take that onion back a little bit further, but be maybe before we get to that Lloyd, what's maybe like one more thing that's in kind of like the core pillars of doing merger or acquisition integration. Well,

[00:20:48] Lloyd Metz: yeah, people.

[00:20:53] When you get a group of people together, they develop a culture, right? So the target company's gonna have a culture, the acquirer, the buyer is gonna have a culture, and then a way of doing things and being mindful of how cultures work, how they mesh or don't mesh, how they show up in terms of compensation, promotion, those kind of communication.

[00:21:19] And so. That can take up a lot of time and energy, right? Some cultures, just on a real basic level, just maybe move faster in terms of decision making, delegation of decision rights, other cultures move slower, right? So just that by itself can be like oil and water. But you gotta think about those things and address 'em, because as we've all been talking about you, you wanna move decisively and quickly with integration.

[00:21:49] And sometimes those people issues the culture issues, getting buy-in, developing credibility, as Doug just said, a lot of times that requires some time and so there's gonna be some natural tension. You gotta factor that in.

[00:22:02] Sean Mooney: I think this is another area I wanna pull the onion back on a little more 'cause I think that's so important and not often, kind of appreciate it enough.

[00:22:09] So we'll come back to that and go further. And then the only other thing I'll touch base on is what you just mentioned is. The idea of moving fast and just from the perch that we get to see here, where we're regularly connecting groups for merger acquisition integration, like we talked about in that kind of first instance, and it's just from a pattern recognition.

[00:22:30] What I've seen and what I constantly hear from the groups that do that as a profession is that the human nature intuition is to like, everyone's exhausted from the acquisition. Let's just give everyone a few months to settle. Then what happens is the tribes kind of get further ingrained and then bad things happen.

[00:22:49] And so the other just kind of core pillar I'd say, is like whenever you close an acquisition, rip off the bandaid and just bring everyone together immediately before they have time to get worried and concerned about do they have jobs, or who's gonna be the big sibling or the younger sibling, and what the meshing is.

[00:23:09] So just get it done quickly. That's just one other thing to think about, but let's go back into maybe some of the areas that I think probably warrant a little bit further discussion here.

[00:23:22] Lloyd Metz: Can we talk about synergies? I. Doug mentioned it twice. What is a synergy, Doug, what is that and how does one get it?

[00:23:31] Well, that's just a word I use

[00:23:32] Sean Mooney: to try to get you to pay more. That's something the, the junior partner tells the VP to put into the model.

[00:23:41] Doug McCormick: Yeah. I'll give you a couple examples of where we've had really good success. One has been adding new products to our portfolio that allows us to accelerate cross sell.

[00:23:52] And so for example. We had Scott Milberg on this show a while back. He's in a, a big distribution business, and the premise there has been we're buying niche products that allow us to sell a bigger basket to our customer set. So we don't have access to that product, or we're not well positioned, so we're buying a small business, and then we think we have a very large and very differentiated Salesforce, and we can take that new product, push it through our Salesforce, and not only sell the product which our customer likes because we're.

[00:24:23] Closer to a full service offering to them, we're putting it on the same delivery truck, and so it also improves our cost position. So that's one example. I think the other very common examples are cost benefits, either because I can do more work with the same amount of people. That could be at a cogs basis like delivering the product, or it could be on an overhead basis, or it allows me to buy more efficiently because I've got better scale with my suppliers.

[00:24:52] I. There are certainly other things that improve strategic positioning, but I think those are generally the two most common.

[00:24:59] Lloyd Metz: In that first example with the cross-selling of products. With the Salesforce, in your experience, do you generally have to, does it just work that straightforward Lee, if that's the right word?

[00:25:11] Or do you need to train? Do you need to do product teach-ins? Do you need to adjust commissions or what have you?

[00:25:19] Doug McCormick: For sure. And I would say in some cases it depends on the product. So every plan is a little bit different. But this gets back to there are all kinds of skill sets associated with good integration.

[00:25:30] That's, so now our sales team, they've done 10 acquisitions and in each case they've learned a little something different about what worked well or didn't in each of those product integrations. But you've got incentives that you gotta figure out how to navigate because you wanna make sure that you don't create a scenario where.

[00:25:48] Parts of your team are losing and parts of your team are winning based on not the merits for their, the quality of their work. So you've gotta make sure everybody's aligned there. And there's a lot of teaching not only to the internal staff about how to sell something effectively, but also the customer set on the value properties of that product.

[00:26:06] So it's part of the integration. How do we harmonize incentives? How do we get that product into the network in a way that we can fulfill it effectively? And then how do we teach our sales team to be able to sell it effectively?

[00:26:21] Sean Mooney: It's an interesting point, Doug, and one of the things we talked about was kind of accountability and, and I think a lot of people think that add-ons are the realm of the C-suite, right?

[00:26:32] It's, oh, it's the CEO buck stops there. As you all shared, the CFOs really involved maybe head of sales. How do you think about kind of the change management. Throughout the company. And how low does it go within your organizations? And not low meaning good or bad, just meaning like directly touching the tips of the spears of your business in different places.

[00:26:54] So how do you think about, like how far down do you manage this kind of change process within your organizations when they're doing an add-on acquisition?

[00:27:02] Doug McCormick: I mentioned earlier, I think there's a real tenuous time early in these acquisitions where you're putting in capabilities to do this kind of stuff.

[00:27:10] I. Really challenging thing is this point you're bringing up and it's really a question of where on the spectrum of centralization are we trying to migrate? There's a real balance here and it's different for every business, but the way we try to think about it is we still think you've gotta have a general manager, let's use technical services for example, where you've got a bunch of site based locations.

[00:27:35] We think we still need a general manager at every site who has full visibility into the p and l. Who can control the customer experience and be accountable to the p and l. And at the same time, we need to figure out a way to do enough things in common that we can give him all kinds of leverage in terms of things like technician training, technician recruitment, technician retention, purchasing of whatever we're gonna provide to the customer set.

[00:28:03] And so there's this real give and take balance that happens. And I would say the bigger you are. I think the need for centralization increases, but if you're not careful and you over centralize, I think you lose touch with the customer. And so I think good organizations continually experiment with this, and I think it's a product of the organizational capabilities and the quality of the management teams At the site level, it doesn't get easier.

[00:28:31] I would say there's more opportunity for creating value, but the stakes get higher and harder and the complexities increase.

[00:28:38] Sean Mooney: And I think that's a great example of when you're buying almost these, this is probably not the right way to say it, but almost like these self-contained smaller units or businesses where you're adding on maybe a lot of these kind of smaller location-based entities.

[00:28:54] How do you think about that when now you're taking like two manufacturing companies that are maybe bigger and more complex and maybe they've got overlapping Venn diagrams of customers and regions and probably. Sometimes they're both selling the same thing to the same customer. How do you think about that in terms of also how far down you have to manage the messaging and how you're gonna work together

[00:29:17] Doug McCormick: and pull on the OS together?

[00:29:18] I think I mentioned earlier in the technical services, like the first example, we often do very small acquisitions and we move very quickly. We do high velocity MA on manufacturing distribution. It's much more measured because of the issue you just mentioned, because I think when you have overlapping capabilities like that.

[00:29:37] You have to find a way for the group to effectively evaluate like, where's the competitive advantage reside? And you gotta migrate all the competitive advantage to that location at the expense of the other and figure out how to develop a capability or fill that manufacturing location with work that is commensurate with game.

[00:30:03] But that's also very disruptive and takes a lot of time and you've got a lot of incentive misalignment, like we talked about. You got winners and losers there that you gotta figure out how to work through that change management.

[00:30:15] Sean Mooney: And is that plan kind of worked out typically before you even make the acquisition?

[00:30:19] Do you kind of know what's gonna happen or how much of that kind of happens before versus in the moment once the two entities have become one?

[00:30:27] Doug McCormick: My view on those is like, because they are meaningful. Projects. I think you've validated the assumption, but you probably haven't worked through how you're gonna get after it.

[00:30:40] So we've convinced ourselves that both organizations have differentiated capabilities. Organization A is better at A, B, and C, and organization B is better at the following. And so we think there's an optimization to be had and then we'll figure out how to get that post acquisition. I think.

[00:30:59] Sean Mooney: If A is the acquirer, and this is your platform, this is kind of the provocative question that I always wanna ask, but never have because when A is the acquirer and they're acquiring B and then B has pockets, they're better than A, that are overlapping.

[00:31:15] How do you manage that discipline with your CEO? 'cause they, I'm sure they feel protective of their group, like we're the acquirer where you say, Hey, we're requiring B because of what they have there. And that unfortunately is gonna come. At the expense of, you can't necessarily do everything double. So like you're gonna have people on your team that aren't necessarily gonna be part of the plant, and that's the hard reality.

[00:31:38] Lloyd Metz: That's a real conversation. I can think of one instance where one of our portfolio companies acquired their larger competitor and the going in body language and stance was, we bought you, so we make. All the decisions our people win. Your people will let you know if you still got a job. And I was like, whoa, whoa, whoa.

[00:31:59] Wait a minute. Let's look at this factually, objectively. And in many cases I was like, they're actually better than our people. Their people are better than our people. And he was like, well, what makes you say that? Well, look at the pricing. Look at the quality, look at this. And they're still. Putting up good numbers.

[00:32:20] So that means the sales person is actually really good, or that means the procurement person is actually really good because they're working with sort of a weaker offering than what we have. So that speaks to the quality of the person in the seat. And so they're like, oh, okay, well let's rethink of this whole thing.

[00:32:39] And it, and it worked out great, but you kind of have to park your ego a little bit at the door. Is, is what I found. Just because you're the acquirer doesn't mean you and all your people are gonna be the winners. Maybe depends on the relative size of the business and the nature of the business model, but that's a watch out.

[00:32:58] Doug McCormick: Yeah. A couple reactions, an off the cuff reaction is, I think this is one of the reasons where this works so well when you CEO, but your senior leaders in the. Have significant equity incentives because all of a sudden they're optimizing around wealth creation as opposed to like organizational hierarchy.

[00:33:17] And listen, we've had a, a couple situations where we bought a $25 million business, turned around and bought a $40 million business, and that CEO of the 40 became the new CEO of the entire. So we acquired it with a smaller business and then the guy we acquired became the CEO, and then we bought a $300 million business and.

[00:33:36] The CEO of the second business became the CEO of the entire operation. And so like I think we get people focused on like, this is gonna be very dynamic. It doesn't necessarily imply just because you were the first in the barn that you are on top of the barn. And so I think forcing this collaborative discussion upfront about who does what well is really important.

[00:33:59] But I would say there is a tension between, okay. They may do it better, but they are now 20% of the business and we need consistent more than we need better. And the disruption of better isn't worth it, but at least you had the conversation and you got to that opinion through choice as opposed to just an assumption.

[00:34:19] Sean Mooney: Good point though. Yep. Yeah, kind of the metaphors. You'll know I love my metaphors. It's only annoying. I know how to think. I was watching Survivor with my kids last night. And the thing that I was thinking through as you were talking about this, is like when the tribes merge in that show, it's not always the dominant tribe that kind of wins, but ultimately the two end up being better and they kind of sweep the field.

[00:34:40] If it's done well, it's not, everyone's gonna win. Not everyone's gonna lose, but if they figure out how to do it well, then they kind of clear everyone off and they're better for it. And the other thing that you kind of notice, even in this little show where they put people on an island for a few weeks.

[00:34:55] The cultures of these tribes become very distinct. Right. And so that got me thinking even further now you've kind of have this map, you have this plan, you kind of know who's gonna win. How do you think about cultural integration? And not only the pros, but also the risks. So Lloyd, what's your kind of 2 cents on that?

[00:35:13] Lloyd Metz: Yeah, it's hard. Because you definitely want to be considerate to people. You definitely wanna be mindful of coming in and feeling like you're jamming something down someone's throat or you're coming in like an autocrat. Here's what's gonna happen. I'll hear what you have to say, but it's not really gonna change the decision, right?

[00:35:33] This is what we're doing, versus move decisively, move fast, and. As the acquirer or the sponsor back in the acquirer. I think you have to fight that human instinct for the former and lean toward the latter because the bottom line is people at the target don't like the uncertainty.

[00:35:56] Sean Mooney: And what happens if your cultures are like oil and water?

[00:35:59] You've got super fast movers that run fast and loose versus more deliberate kind of consensus driven. And you put those two together. I. Is that something that you can meld? How do you think through that?

[00:36:13] Lloyd Metz: I don't think you just slam 'em together. I think you gotta knit them together and you have to take some people from the, assuming the acquiring platform is the faster moving culture.

[00:36:28] You gotta plant some leaders into that acquired culture and help coach 'em up to see if they can get their leg speed up and get their turnover right so that they can move faster. And then you also start thinking about your HR strategy for hiring. If you do intend to hire, to add to the target's team, you start hiring people that are more fast twitch muscle.

[00:36:52] And over time you start to change that culture, but you definitely don't slam 'em together and expect them to just start running fast.

[00:37:00] Sean Mooney: Yeah. And how much do trust falls actually come into play here?

[00:37:07] Lloyd Metz: So communication matters, right? And being decisive, being clear, and doing what you say you're gonna do matters a lot in building the trust of the team that's being acquired. It's not so much about whether I like the decision or not. Okay? You guys bought us. What does this mean? Right? Being able to give clear, understandable answers.

[00:37:30] Stick by what you tell folks. And execute against it and not waffle or equivocate or let stuff drag out for weeks and months. That's where things go sideways.

[00:37:42] Doug McCormick: I'm still like trying to get my head around watching Survivor and admitting it. As you all know, I have no shame,

[00:37:52] Lloyd Metz: but that was very trusting of you, Sean.

[00:37:54] Yeah. Yeah. I, I share,

[00:37:55] Sean Mooney: you know, I'm an open book here. I'm a child of the eighties. TV raised me. Let's be honest.

[00:38:02] Doug McCormick: There's a lot of good meaty topics here. I think one is, we talked about reintegration planning before the deal even gets done. I think. You're always better off to get the hard topics on the table and preserve the integrity or the trust than trying to sugarcoat it, and then you have a trust issue when it comes out after the fact.

[00:38:22] For me, when it comes to culture, I think Lloyd and I have to acknowledge the sponsor can play a big role in what that culture ends up looking like. The way I think about it is cultures that are stylistically different. Running loose versus buttoned up. That to me is manageable. It's the value differences that really are hard to navigate.

[00:38:44] And so for me, if I can get people to say, we value curiosity, we value integrity, we value passion, we value team, then the different styles I think can find a place to work in that organization. But if you don't have that common ground about people being able to ask questions, be curious, and have integrity.

[00:39:04] That's really hard. It's not easy to fix. You lose a lot of people. I

[00:39:09] Sean Mooney: think that's really well said. And I'm, I'm just even reflecting on the microcosm of here, we're at the point too where I, and I want to touch on one of the topic on this, you know, even around acquisitions. So we're at the point where we're starting to look at acquisitions and one of the things that as we were building this business from the early days, the values kind of were really, really important.

[00:39:30] Drove a lot of what we're doing, and then there were traits. The traits that I was initially looking for was like, oh, I just want create a team of me. All these like super. They're just like running full speed and running through. Then I very quickly realized like, if this company were a team of me, we would be in big trouble.

[00:39:49] Like just like bouncing off walls and just everyone's like, go do this, and we all take the hill and then realize we, we took the very wrong hill. So, so there's value to having kind of varied perspectives and approaches, and that's been one of the secrets that we've done is like, oh, you gotta have different mindsets, different perspectives, different ways you behave.

[00:40:08] But Doug, in terms of how you've. I think framed it really nicely as well was if you have team, you have integrity, this curiosity mindset and you like to win and you have that mutual, then it can kind of come together and maybe even better with a broader range of traits, if you will. Is that maybe a fair way to

[00:40:27] Doug McCormick: think about it and economic incentive where everybody sees the value of navigating tough choices or uncomfortable situations?

[00:40:36] Lloyd Metz: Sean, I would love to hear your thoughts on this too. I'm thinking back to some situations that we've been in. I understand what you're saying, Doug, agree with it, but as I think about the CEO, the C-suite, and then there's the next level of direct reports, oftentimes, depending on the size of the add-on that second level from the CEO, is the senior level peer to the target that you're buying.

[00:41:03] What does that all mean for those folks and then their direct reports? What does curiosity mean? I'm the manager, the supervisor of the line or the shift or this location. What does that mean for me? I've done the town halls from the plant floor and like how do you make that understandable, clear and real for everybody further down in the organization?

[00:41:27] Otherwise you can set up the leadership level at odds with their team.

[00:41:33] Doug McCormick: I don't have a perfect answer, but I would say if we can create. Those values amongst the senior leadership team, the decisions that we make reflect those values, and I expect those leaders to act in a way that promotes those values.

[00:41:48] I go look at it and I go, intellectual curiosity means we're sitting around at the board meeting and asking questions like Sean asked about if this acquisition has a better capability on this certain thing, even though it's much smaller. How do we make that across the whole organization and when the organization sees that being executed?

[00:42:04] I think they begin to adopt the right mentality and they see their managers being willing to take on hard issues and disagree for the benefit of the company, but I think it has to permeate down. I certainly don't think I'm in a position to communicate that or make it real for the workforce.

[00:42:24] Sean Mooney: And I think good organizations hire to their values as well.

[00:42:28] Every scorecard when we're interviewing someone, we have a whole module just around. Testing on their values. And when we think that like curiosity, are they someone who asks the question why a lot? Or, I don't know, I'm gonna figure it out. If something gets in their way, do they stop? Or do they like, oh, I'm gonna figure out how something works and I'm gonna be like curious about the world and.

[00:42:48] People who constantly talk to chat GBT as their best friend on their phone. Well, maybe not that, I'm probably singular in that, that regard in our, in our company. Uh, I just need friends. I found one in chat GBT. So that's a different, that's a different episode.

[00:43:06] Doug McCormick: Which reminds me of our conversation on ai.

[00:43:09] When you tell me how you compliment your chat, GPT bot, I just, I say thank, we have a good relationship. It's really nice.

[00:43:17] Lloyd Metz: Hey Sean, I think I know what I'm getting you for Christmas this year. One of those humanoid robots,

[00:43:23] Sean Mooney: I don't know. Those things are a little sketchy. Lloyd, get me one too. So really two things I wanted to touch deeply.

[00:43:31] Like one, I'm gonna do a deeper dive into it, which is one of the biggest complexities, but even before that. I have just more of a curiosity, even though I'm thinking about like our ghost of Christmas future here. It's kind of interesting. I was thinking about, as we're thinking about what would our acquisition strategy be, and we're built to be kind of like a lean, mean machine.

[00:43:50] I was thinking the other day like, how would we even find the hours to do this? We're not building in extra capacity to start throwing in acquisitions. We're trying to use every dollar with the highest expected value on an organic kind of run. If we were to throw an acquisition process in, I don't even know how we would find the time to do that, because we're not built with that excess capacity.

[00:44:14] How do you all think about that with your Portos when you take 'em from kind of an organic focused business to now we're gonna start throwing acquisitions in like, what's that move want?

[00:44:24] Lloyd Metz: Yeah, that's a great question because what you're raising, and we've touched on it a little bit so far. It's not just, are you doing acquisitions or are you not?

[00:44:32] It's at what velocity and volume of acquisitions. 'cause it seems like if you're an occasional acquirer versus a monthly, quarterly serial acquirer, I think it's different.

[00:44:45] Doug McCormick: Yeah, Sean, from my perspective, I, I would just acknowledge first the difference between your business and a lot of the businesses that I'm speaking to, the businesses that I'm working with are growing two to four times GDP organically and.

[00:44:59] Then we're enhancing that growth with acquisition. My general perception is you're growing at a much faster rate, so that has implications for organizational bandwidth to navigate change. The other thing I would say is I kind of feel like the markets that I'm playing in, I'm playing checkers. And what I mean by that is relatively low risk moves that incrementally enhance my position.

[00:45:22] And every once in a while I get presented with a chess opportunity where I can do check because I've got a strategic move. I think for you and organizations like yours, it's more about the head space to see the strategic move than it is the capacity to go implement a bunch of m and a, because I think it's more like one or two moves and you change the game and it was tremendously strategic.

[00:45:45] It's a different kind of capacity, I guess,

[00:45:47] Lloyd Metz: but it also sounds like he's just struggling with any capacity, right? Given the growth rate of his business and whether it's as fast growth as blue, even the. You and I talk about, generally speaking, these lower middle market companies don't have excess capacity as a given.

[00:46:06] Right. Regardless of how they wanna apply it, whether they wanna play chess or checkers, they generally don't have capacity.

[00:46:15] Doug McCormick: I agree. But I guess the way I'm thinking about it is in my businesses, I know with a high degree of certainty, it's super fragmented. If I create the m and a capability, I will be able to deploy it.

[00:46:25] It's a good ROI. And for Sean, I'm kind of saying I think it's more like staff around you to give yourself the head space to evaluate what transactions make sense strategically, and then if you found something you could get a buy-side banker. There's lots of resources to give you that capacity.

[00:46:46] Sean Mooney: Yeah.

[00:46:46] That's where, as I'm reflecting on what both of you are saying here, is that this is going to be a strategic part of any company's toolbox. The art of strategy and execution is allocation of resource. And you gotta find a way to get the resource there to make it go right? 'cause it goes right. It can create tremendous value.

[00:47:04] But as we've talked about earlier, if it goes wrong, you could destroy yourself. It's two steps back. And not really destroy yourself, but hurt it. So as I was thinking through what you all were sharing, Doug and Lloyd, it was like, well, yeah, if this can be part of your toolbox, like position yourself to win and allocate resources around that,

[00:47:20] Lloyd Metz: that's a good way of thinking about it.

[00:47:22] Absolutely. And I might make the case that destroying value obviously is bad, but also injuring yourself, right? As an organization and you're just kinda limping along, that's also bad relative to having done nothing, right? You probably would've been better off not even bothering you if you're just gonna limp along and one plus one equals two with a.

[00:47:48] Sean Mooney: Let's just in this last couple minutes, touch base on one of the things that's the most complex. How do you all think about kind of the IT integration that happens? And maybe this is a tactical way to end the conversation, but I think it's an important one to touch on.

[00:48:02] Lloyd Metz: I think just as a starting point, you wanna have your systems

[00:48:12] as integrated as possible. Centralize as possible, but you want 'em to be robust. So it may not be the best system, but it needs to be a good, solid, reliable system that you can, again, depending on how you answer the question, are we gonna be making acquisitions every month, every quarter, or are we gonna be making 'em every other year?

[00:48:34] Right? It needs to be robust enough to port over the information from the newly acquired target relatively quickly, relatively simply, relatively straightforwardly. And have enough capacity to scale to however many offices or people or desks or field offices or whatever it is the business model needs to be, but it, it needs to be solid and reliable and scalable.

[00:48:59] Doug McCormick: This is arguably one of the most strategic integration issues. It's the one that has the longest kind of work stream and the least fidelity on progress along the way. Sometimes to me it's not a matter of, it doesn't pencil out as a good ROI, but it is also not tenable not to do. Right? So it's like you do the math and it's almost like it's a drag on the ROI of the entire investment, but it's a cost of doing business to be able to accommodate the complexity associated with the larger business.

[00:49:30] And to me it gets back to it's generally more of a change management problem than a technology problem. And the challenge that we often find is it starts with you have different processes at these different companies, and until the processes are the same, the ERP system cannot accommodate different processes, right?

[00:49:50] So first you gotta agree on what the right process is, map that out, get everybody trained, and then you gotta get 'em on the right system. I generally find this is the one that takes the longest. We say this about it in general, it's. We miss our estimate on how much it will ultimately cost. And I think it is the, if I had to pick one, the single biggest impediment to a rapid consolidation, because if you know you, you've acquired 20 businesses and you've only got five of 'em on the same system.

[00:50:21] The scale of that organization collapses on itself at some point when you haven't allowed the business to talk as one. Both

[00:50:30] Sean Mooney: of those are very well said and, and as I just look from our perch here and what are drivers of project demands, the the ones that go sly where they're really thinking about the technical integration, the beginning, and they're building that into the economic models.

[00:50:43] Your point there where we see it go really bad is you just acquire so quickly and then they've got seven different systems, none of 'em that talk to each other, and then eventually the weight of that, just that tech debt just almost collapses and brings the organization to a halt. And then selfishly, it's one of the biggest drivers of this really awesome interim CFO ecosystem we have.

[00:51:03] 'cause like the CFOs, they go through like seven of 'em because they're just, none of the systems talk to each other and they're flying blind. And

[00:51:10] Lloyd Metz: I think though, the, the key part that I like the most about what Doug said is I think people get it wrong on the integration because they're focused on the technology, the ERP, the system and not the process.

[00:51:22] And that's painstaking and can be super painful. And it involves the change management, right. Doug, you mentioned that, but that's what the real problem is. It's not so much the different ERPs, that's just a reflection of different processes. And if you have dramatically different processes, 20 or 16, whatever your example was, Doug, that's what kills the company.

[00:51:46] But just don't think it's just the technology just. If everybody were on Sage, it'd be great, right? Well, you'd still have 16, 20 different approaches to things, so fine, you're all on sage, but you're still probably gonna have an underperforming company.

[00:52:03] Doug McCormick: A random example of the challenge with this, we actually have found a pretty high correlation to our success in these rapid consolidations, is when we see a high penetration of one IT system within the market.

[00:52:17] Right, because then we end up buying a bunch of businesses that are all in the same IT system, and so you still have some integration, but the risk on that one is much harder. And when we find your point, you got eight different ERP systems and you got none of 'em that are really well established, that's a tough lift in

[00:52:34] Sean Mooney: some ways, what you are describing is, I'm thinking this is the unglamorous part of m and a, this nitty gritty part, but so essential to winning.

[00:52:45] This is kind of like the Patriots. Everyone just do your job and did the little things right? And then the process drives the outcome. As much as I really, really did not want to give a Patriots example here, this is when you're a Cleveland's Brown fan, you, you don't like any of the teams, but that, so I guess I could be okay with that.

[00:53:00] Doug McCormick: What do you wanna say, Eagles?

[00:53:01] Sean Mooney: Nah, I don't say that. I don't wanna say I'm all in on the Longhorns next year.

[00:53:07] Lloyd Metz: Austin, Texas upbringing. I guess we need to have a football episode at some point.

[00:53:12] Sean Mooney: All right, so we've mixed lots of metaphors here. I think we've given a really good kind of MBA class on merger integration, acquisition integration, and so I think it's been really helpful.

[00:53:22] I, I really appreciate not only the insights you've shared, but I've also taken a lot of notes for myself here today, guys. So thank you.

[00:53:29] Lloyd Metz: Hope it's helpful. Thanks, Doug. Thanks, Sean. Good

[00:53:32] Doug McCormick: seeing you

[00:53:32] Lloyd Metz: guys.

[00:53:35] Doug McCormick: A special thanks to HCI Equity Partners, a lower middle market private equity firm focused on driving transformational growth through consolidation strategies by partnering with family and founder owned manufacturing services and distribution companies.

[00:53:50] Learn more@hciequity.com, ICV Partners and Innovative. Lower middle market private equity firm, supporting management teams of leading companies at the lower end of the middle market. Learn more about IC v@icvpartners.com. And finally, BluWave the Business Builders Network, connecting the most proactive business builders in the world with the best of the best service providers for critical variable, on point, and on time due diligence and value creation needs.

[00:54:22] Learn more about BluWave at BluWave. Bed for further information on H-C-I-I-C-V and BluWave and relevant topics discussed here in the episode. Please see the episode notes or links.

[00:54:36] 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 here in.

[00:54:46] No representations, warranties, financial, legal, tax, or other advice are made herein. Consult your advisors regarding any topics discussed during this episode.

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