When Things Go Wrong: Diagnosing and Fixing Portfolio Problems

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

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

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

[00:00:43] Doug McCormick: Good to see you guys.

[00:00:45] Sean Mooney: It's always good to be back with the three Musketeers here. We've got another really interesting kind of pivotal topic. It's more of the one that, candidly, I never experienced in private equity, but I think you guys have, and it's what happens when something goes wrong.

[00:01:01] Lloyd Metz: Oh, that's funny. Let me guess. You're asking for a friend?

[00:01:04] Sean Mooney: Yeah, a friend. Well, a friend of mine, I had plenty of troubles every day, but me, no, it's all up. And to the right.

[00:01:10] Doug McCormick: I'll take the other side of that argument, which is I can't find a circumstance where it's. There's ever been a deal where everything went right, right?

[00:01:17] There's always some bump in the road, some challenge, so this is gonna be a valuable discussion.

[00:01:23] Sean Mooney: So does that sound like a good topic today, guys? It definitely is. All right, so let's kick it off. The first thing is, how do you all know when something's even going wrong?

[00:01:34] Lloyd Metz: Yeah, that's a good one. Because there's the obvious stuff, right?

[00:01:39] Your financials, sales, profits, margins, whatever. But now I think about it, things could be going wrong while your financial performance is good. So I don't know if financial performance ultimately is the best thing to look at or pay attention to, to figure out if things are going well or if things are not going well.

[00:01:59] Sean Mooney: Let's talk about your financial statements, your income statement, your balance sheet, your cash flow. We'll get into maybe the shortcomings on that, but before we get to that, like why is that something that is a measure and overall that you would be looking at?

[00:02:12] Doug McCormick: Yeah, so I think there are a couple ways that the financial statements can tell you important information about the quality of the operations of the business.

[00:02:19] So, you know, think about revenue growth. Obviously that can be a reflection of a bad market or a good market, but I also think it's an indicator of the quality of service I'm providing to the customer, customer retention customer's desire to buy. So that's obviously an important one to look at and think about as a way to diagnose.

[00:02:37] To me, margin profile is also a reflection of. Are the operations tightly run? So am I delivering my product or service in an efficient fashion? I think g and a is an interesting one because we're always trying to balance delivering on today's financial promise, but having the investments and infrastructure to accomplish the strategic direction that we're looking for, that's something that we should be looking at.

[00:03:01] But I, it's often not representative of the quality of the business in, in my mind. And I think while those are super important indicators, I think we all gotta acknowledge these are rear view indicators, and so it's not an early indicator sometimes.

[00:03:18] Lloyd Metz: That's right. Doug and, and Sean, I don't know what your experience has been like, but oftentimes the monthly financial reports that we get from companies have a fair amount of detail.

[00:03:29] So it's not just simply revenues and cost of good sales, a typical income statement that folks may be used to. There is a fair amount of detail beneath it by segment of our product line or by geography or office or, or whatever is relevant for the business. But fundamentally, Doug hit it on the head, but your financials are produced seven to 30 days after the end of the month.

[00:03:54] So they're rear view kind of numbers and they don't necessarily reflect the activity, customer activity, your company activity that. Led to those financial results. So that's one of the biggest shortcomings, and that's what we could talk about it later, but I'm thinking about situations where performance was good for several months and then it stopped being as good and started to deteriorate.

[00:04:22] When you peel the onion, ultimately you realized things had started to unwind during the period when the financial results were still good, so. Your question has got me thinking about some of the shortcomings of just looking at the financial reports

[00:04:36] Sean Mooney: as I think about what your financials are, right? It's the ultimate kind of ledger of your wins and losses in your record in history, right?

[00:04:44] So it's kind of like Bill Parcell's kind of famous quote. You are what your record says you are, and it kind of captures your wins and losses, but then you lose your quarterback. What you're gonna do going forward is very different. It is what you were, right? And so it is a very accurate encapsulation of the performance of the business, and there's challenges with that, right?

[00:05:09] You might have had the easy part of your schedule earlier, or there might've been things where your team cheat. You have a bunch of people injured, and what's gonna happen going forward is gonna be different than what happened in the past. And the other thing that I think with the financials is so much you could have something going really good in part of your business, and then meanwhile, part of your foundation could be crumbling.

[00:05:28] And it's masking that.

[00:05:30] Lloyd Metz: That's exactly right.

[00:05:31] Sean Mooney: So it's not just the, the top line numbers, it's the subtext in between them. The biggest challenge that I look at is it's very much a backwards looking measure versus a forward. And so you don't really know what's coming. Do you guys think it the same way?

[00:05:45] Lloyd Metz: Agree a hundred percent. I don't know what your experience is like, Doug, but I, I think to Sean's point, what exacerbates it even more is some businesses and some business models have longer sales cycles, longer marketing cycles, and that makes those forward looking metrics, those forward looking activity.

[00:06:04] You can talk about sales funnels and all that, even more important because by the time it shows up in your financials, you may be 3, 4, 5, 6 months into a trend.

[00:06:14] Doug McCormick: Yeah, I totally agree. Yeah, Sean, I think it's super compelling the way you are thinking about this is not a homogeneous business, right? I have no business, which is homogeneous enough that when I look at the aggregate income statement, it tells me the whole story.

[00:06:29] And so we often have service businesses that you gotta look at it by geography, or we have distribution businesses where you gotta look at it by business segment or manufacturing businesses where you gotta look at by product type. And so I generally find in most of our businesses, there's some parts of the business that are performing above expectation and a number of parts of the business that are performing behind expectation.

[00:06:49] But that's super valuable insight because it also often tracks like strategic initiatives. Like if I'm investing in new product, am I seeing that traction? If I've started a Greenfield location, am I seeing that traction? There is some really valuable feedback relative to like the strategic roadmap, which I think is another part of.

[00:07:07] The assessment of when you're diagnosing what's going wrong, sometimes you could have great financials, but not making progress on the strategic initiatives.

[00:07:13] Sean Mooney: Yeah, I think like a great example would be if you looked at the first quarter of every kind of Crossan shipping company, they probably did really, really well in the first quarter of the year as the entire world was trying to get product into the US in front of the tariffs.

[00:07:33] Right, the April month, probably not so good. May, and so the, the numbers can be misleading, but then as you said, pointed out, it's like when you pull it apart, there's so much information there. And, and the other thing I would say is like so many people get caught up on the income statement, but very much it's the cashflow statement and the balance sheet that tell you the better story or the more true story, right?

[00:07:53] Companies can do things to capitalize costs and kind of hide them. You can see inventory growing tremendously while you're still generating sales. And then A, you're basically capitalizing costs, but B, you've got a problem 'cause your inventory's not selling through or there's a big problem. And so it's not only you have to look at your, your income statement, but it's all the other statements that tell so much of the picture.

[00:08:16] Lloyd Metz: That's right. Doug, what's been your experience in, because a lot of what we're talking about is internal. How do you know when. It's an external market driven dynamic. Sean, your example is making me think about that, right? How do you know when you're looking at the reporting packages from our companies, if there's been a market shift, if there's been a market change that's driving the change in the performance?

[00:08:43] Doug McCormick: Well, first of all, listen, you bring up a really good point about like the private equity vantage point. I often find that I'm a mile deep and an inch wide. In terms of where we are in the portfolio company, it's very easy to be myopically focused. It's hard sometimes to get good quality information about how you should relatively compare yourself to the industry.

[00:09:02] For me, most industries have some kind of data that you can buy often, which I think is a really good way to kind of measure yourself against the market. And I also find it's an underused resource, but you know, we have. These great investment banking relationships because we're paying banks to help us sell businesses and buy business in some cases, and they often have a much better kind of macro view because they're interfacing with our competitive set frequently.

[00:09:29] And so I find having a couple relationships for each business there where they can help you suss that out. Super valuable as well.

[00:09:37] Sean Mooney: I'd love to dig deeper into this, kind of like how do you diagnose that, but maybe before we go into that kind of deep dive. There's a lot of good ways you can get information from your financial statements.

[00:09:50] And then in some ways, I think not only looking at history, but also it's like how is the rate of the rate of change changing gives you a lot of information, but those are all still like historical measures. What are some leading indicators that you will look at? Is there a way to kind of look forward beyond the monthly close that gives you maybe a little like 1, 2, 3 months ahead version of the business?

[00:10:11] Maybe not 4, 5, 6. That will be like some of the other deeper kind of diagnostic issues we'll talk about. But what do you look at in order to get at least a slightly more telling vision of the future?

[00:10:22] Lloyd Metz: With some of our companies, we do track gross leads and then marketing qualified leads, sales qualified leads, conversions into meetings or orders or whatever's relevant for the business.

[00:10:36] That gives you some sense of activity, both from your sales and marketing organization, as well as client activity and market activity that can be helpful. Again, depending on the business model, sometimes it's matters or cases or projects that are opened. That again, gives you a forward looking view of activity.

[00:10:59] So once the project is opened. Then you'll start getting billables or getting revenues or what have you, and you can start to craft a a bit of a forward looking funnel, but it's rarely a hundred percent accurate. And then most of the businesses that we're involved with, it gives you a partial view of what's coming, but it's not a perfectly clear crystal ball.

[00:11:21] Doug McCormick: Yeah. Lloyd, I guess for me, I think the key thing you're saying is really what we're talking about are KPIs, key performance indicators. And they're different for every business, right? So for some businesses that's backlog. We have some businesses where that's employee turnover, right? Because if you have a, a labor constrained business, like that's the most important thing between you and your objectives, sometimes it's yield.

[00:11:43] It's an understanding of the key drivers of the business, and then coming up with the KPIs that matter.

[00:11:48] Sean Mooney: I think that's exactly right. The good thing about financial statements is if your office of the CFO is doing what they should be. Your record is what it says. It's right. The looking into the future is the harder part, but you kind of have to, right.

[00:12:02] Do your portfolios do 13 week rolling cash flow forecast? Do they also do things like reforecast during the year as you get closer? Are they doing any of those kind of things as part of their regular kind of flows?

[00:12:16] Doug McCormick: Yes and yes.

[00:12:17] Lloyd Metz: Yeah, absolutely. Absolutely Both. In many cases, the reforecast. Three plus nine, six plus six, all that.

[00:12:27] Nine plus three definitely is part of the toolkit.

[00:12:30] Sean Mooney: It's just kind of human nature. In someplace, there's a narrative that some leaders wanna tell. How accurate do you think they're on these kind of reforecast and like how much hope is baked into those at times?

[00:12:42] Lloyd Metz: That's something we, we have to track, right?

[00:12:44] Gimme your call, and then did you hit your call? And do you have a history of making or missing your calls? Right? We have to track that. Meta analysis or whatever you want to call it, right? But that's the next level. How good is Sean at making his call?

[00:13:00] Sean Mooney: You're doing unto your portfolio companies as your chief revenue officers, probably doing to your salespeople, right?

[00:13:05] Like a good sales organization like That's right. Make your salespeople forecast and then see how accurate they are, and then force rank them and against each other and hold 'em accountable. And you're doing the same thing sounds like to your executive teams, like, Hey, are you forecasting well?

[00:13:18] Lloyd Metz: Or at least you know, if there's a bias or a tendency, then you can factor that in.

[00:13:23] Lloyd's always under budget by seven to 10%, no matter what he says. That's what it winds up being, right?

[00:13:33] Doug McCormick: I've heard the study, I can't validate that this is accurate, but somebody told me there was a study where a bunch of private equity guys were interviewed and they were given a bunch of attributes that they were supposed to evaluate their deals with.

[00:13:45] What was quality of the management team, C-E-O-C-F-O, quality of business model and market, et cetera. One of the highest indicators that correlated with success was a quality CFO. I think that's interesting, and my belief on that is it's not necessarily because the quality CFO has an outsized impact directly, but businesses that are forecastable and a team that is able to forecast buys themselves time, both in terms of reacting quickly, but also in terms of seeing what's ahead of them so they don't run into the wall.

[00:14:17] So just that whole skillset, it's a core competency. I

[00:14:20] Lloyd Metz: can't agree with you more, Doug, and, and I thought we had an episode on the importance of a good CFO, but that's what a good CFO allows an organization to do, buy time to react and anticipate that is super critical and a underappreciated capability that a good CFO brings to a company.

[00:14:37] Sean Mooney: It's something I think we've talked about, and I know even when we were hiring A CFO here, it's just the idea of like, if there's a hierarchy of CFOs, it's like the good kind of accountant controller will tell you what the numbers are. The super controller can tell you why they happened. They don't get the CFO and they can tell you what will happen.

[00:14:56] Lloyd Metz: Exactly.

[00:14:56] Sean Mooney: And then the strategic CFOs will tell you not only what will happen, but here's how you change the future. And that's invaluable.

[00:15:05] 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.

[00:15:19] 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.

[00:15:41] And value creation needs. Now back to the episode,

[00:15:48] Sean Mooney: I think the clear thing here is it's not easy to tell in real time. I guess over time it becomes very clear, right? And eventually, like we used to have what I would call the three board meeting problem when I was in your suit and you get to the first board meeting in March and you could see kind of like something's going on in the numbers you didn't quite know.

[00:16:07] And like you kind of see whist of smoke coming up from the financial statements. In the second board meeting, now you're seeing tips of flames. My friend is seeing, not me, of course I never had any problems. But the second meeting, my friend is seeing tips of flames and he goes, team here, I thought you said you were on this.

[00:16:23] And the third board meeting, it's like, there's a fire, I'm ready to get my fire extinguisher. Like, ah, you know, like everyone's running around and it's like crazy.

[00:16:32] Lloyd Metz: Check that door for heat.

[00:16:33] Sean Mooney: Yeah, you're like, code red. Code red and like, so it was just chaos. So it's not easy. All people in pe, they're, they're used to doing this in the management teams, but eventually you figure it out.

[00:16:46] But let's maybe now go back into that deep dive. Like you've got a spidey sense often, like you don't even know why, but you have a sense that something is going wrong. How do you then kind of diagnose that? Like what's the process to say, let's figure out here's what really is happening?

[00:17:03] Lloyd Metz: That to me, I think is often the hard part because rarely I find is it sort of one thing.

[00:17:10] It's often a combination of a few things that lead to the fire image that you were talking about, right? And figuring that out can be hard, particularly if it cuts across dimensions like leadership. Not always the C-suite leadership, but sometimes it's a layer down in the supervisory managerial leader group.

[00:17:34] Unclear KPIs, unclear objectives, inconsistent. Review of activities and results that can lead to some of these problems bubbling up. To use your example, right? Inconsistent maintenance allows for a fray wire or overloaded circuit to be missed. And then you go to the operational part. There may be something going on in operations that isn't quite working right.

[00:18:05] You put those two together and that can lead to that spark that leads to the smoke and flyer and the flame in your example, right? Figuring those things out is tricky because rarely are those functional groups, let's say sales and operations. Rarely are they looking at the same KPIs. Are they realizing that some of the activities that sales is undertaking is driving the problems in operations?

[00:18:32] Right? The route may be. In the sales and what kind of business they're bringing in. But the problem shows up in operations, and unless you find a way to bridge those two organizations and have some kind of conversation and dialogue, they may not be able to figure it out on their own. And that's just one example.

[00:18:49] Doug McCormick: To me. There's a really tight overlay between diagnosis and support. And so we talk a lot about private equity trying to support their portfolio companies with operational capabilities or strategic support. So when I'm have a spidey sense, something's going wrong. My first instinct is to support the team to be successful more because like I, I often find like the root causes are hard to discern in a board meeting with a board meeting deck.

[00:19:17] Like the board meeting is designed to process information to make decisions. And kind of course correct relative to strategic direction, but it takes like hands-on work with your team to really understand if I have a, an inefficiency problem on the shop floor where I'm not manufacturing effectively, or I've got a pricing problem, that's like a really good opportunity for our team to be side by side with the functional leaders of that business and then really come to the table with critical insights as you're making recommendations about like what you're gonna do differently.

[00:19:48] Lloyd Metz: Yeah, that, that's where in the private equity model, both the private equity firm and the outside resources and the company have to roll up their sleeves and literally hole up in a conference room and go walk the floor and figure out what's going on.

[00:20:01] Doug McCormick: And let's just comment about the other thing that happens with support.

[00:20:05] The ability to evaluate someone's contribution in a board meeting is pretty limited, right? It's, it's how well do they speak? How well have they prepared for the board meeting? If you're supporting, it means you're working with them extensively in. Daily activities related to the business, and I think you have a much more informed opinion, not only of the problem, but the quality of the team members that you're working with.

[00:20:27] So I think it's, it's informative on team and problem.

[00:20:30] Lloyd Metz: Yeah, you learn a lot more about the teams, the organization, and the depth of talent in a company. In these moments, you really do see who knows their stuff when you roll up your sleeves and try to root out some of these issues.

[00:20:46] Sean Mooney: Yeah, that was always one of the best, I think, interview questions is when you're looking at executives, it it, I don't wanna know when the whole market was going up.

[00:20:53] Tell me what happened when everything was going wrong. What happened? Do they have that kind of tenacity, the grit, the resilience to kind of just keep on fighting through something.

[00:21:03] Lloyd Metz: And some of the characteristics that I'd love to hear what your experience has been, Doug, but it's when somebody who's below the C-suite, that leadership core.

[00:21:14] What kind of curiosity level do they have? What kind of problem solving inclination do they have that initiative, that drive to go figure this out? Because they know something's not right, and when you get down with them and you talk to 'em and you figure out what do they need? This is where Doug, you're saying the support comes from, right?

[00:21:33] Comes from, so do you need outside resources? Do you need additional resources? Do you need to pull people in from some other part of the company? What do you need? Those folks who have those characteristics, that package of attributes, those are great people to work with because you know how to support them.

[00:21:50] 'cause they'll tell you what they need. They'll tell you what the problem is that they have in figuring the problem out. Right. Those are ways that private equity, when it's working at its best, finds a way to support that group of people. It's really exciting

[00:22:05] Sean Mooney: as you're describing this and, and certainly I think as we've all lived this, it's so complicated when everything's going right.

[00:22:11] Very often everything isn't going right. Sometimes it, it masks it until a, you're kind of measuring thing. And my mindset eventually changed to like, not, are we doing better than last year, but how are we doing what we think versus what full potential is? And that's a hard thing to figure on its own, but like if you're going 20% a year and you really should be growing 30% a year, it forces you to look under the hood even when times are good.

[00:22:33] But often you don't want to 'cause you're like, all right, I've got other things to deal with. And the other thing that I, I think that you all brought up that just shows the whole complexity of figuring out what's going on is it could be some combination of three things, maybe four things. It could be a market problem that we talked about.

[00:22:50] And by the way, in the current era, it's a market problem with like a black swan that flies by every month. Now we're like, like, dear God, can we just, uh, one of our team members said. As the resident old guy in the, in our company, he's like, was it ever a calm in the world? I was like, well, there's a brief period in the nineties.

[00:23:10] That was about it. But you know, in the eighties we were all worried about nuclear war every day and the nineties we were kind of like peace dividend. It's kind of nice. And then now, but since then, it's all been crazy. But that's aside, so, but it can be a market issue with all these kind of constant recurring, non-recurring.

[00:23:27] It could be a business model issue or it could be a leadership issue, and very often it's some combination of all three with different coefficients in front of them. With that in mind, you all in the transformation at speed and scale game, right? You've got three to five years and often cases to completely add all this tremendous amount of value.

[00:23:47] How do you balance the need to figure it out? The need to take action versus like the need to also, sometimes it just, it takes time. To kind of figure things out. How do you balance that?

[00:24:00] Lloyd Metz: Back to my comments about seeing the people who are trying to solve the problem. If you can tell that the leadership is agitated enough and showing enough initiative, the desire to want to fix whatever the problem is and figure it out, you can tell when you sit down with them and work with them, their understanding of the business, their understanding, the problem or understanding of what they don't understand, right.

[00:24:26] If they're aware of what they don't know, if they're aware of what they need, but don't have, you can work with those folks. The hard part to your question comes when that leadership group doesn't have the curiosity, isn't experimenting or tinkering or trying to figure it out. There's not sufficient sort of urgency or tempo to or desire to wanna figure it out, or at least what's in their control to address.

[00:24:55] That's when you start to think about, okay, do we have a leadership people challenge here standing in the way of figuring out the answer to whatever's going wrong with the business? That's when you have to take pause and say, okay, is it truly fundamental with the leadership group, or is it that they don't know what good looks like?

[00:25:17] They've not been sufficiently or properly trained on how to deal with this kind of situation. They've never seen it before. And so if you help 'em, support them in understanding the situation and what it might be or the range of things it might be, so call it education, they're like, okay, got it. Now we can apply that to our situation and figure it out.

[00:25:39] But you have to go through a bit of that if that's what you find yourself with.

[00:25:45] Sean Mooney: What I'm hearing here, and tell me if I'm hearing this right, is it's either a market problem or a business model problem, and if it's not one of those two, it's a management problem. And every business goes through market challenges and business model challenges.

[00:25:58] And if they're not, they're not trying hard enough. Right. And in some ways, what you're looking for your management teams to be able to do when times get tough, which they always will at some point, is being able to, with help from you all, diagnose the problems, whether it's a market or a business model, or maybe a sub-team issue, come up with a proposed solution to test.

[00:26:22] Take action and then rapidly iterate until you tenaciously find the result. And if they're not able to do that and or you, they have a team that's not able to do that, it's likely the problem rests at the top. And that's something that I know when I was in your seat, in the seat, I now you never want to happen.

[00:26:39] But it does. Is that kind of, maybe a good way to think about it is your, your teams is like, they gotta be able to diagnose the problem. They gotta be able to. Propose a plan of action, take that action and iterate till they overcome that obstacle. And if they can't, then you probably have the wrong people in place.

[00:26:54] Lloyd Metz: Yeah, and I think as you say that, Sean, that may be the bridge to your earlier comment, which was, how do you know when things are going right? Are you still underperforming your potential? Right? So I think you said you're growing at 20%, but you could be growing at 30. I think if you start doing more of those people and organizational and team assessments and leadership assessments to figure out those three elements that you laid out that may help you unlock the way to get closer to your potential, whatever you think that may be, right?

[00:27:28] Because the way you set this up, the company had been doing well, now it's not, or it's underperforming expectations, and now you're looking at people more closely and you think you may have. The wrong leadership at a particular part of the business, but those people were there when it was doing well too.

[00:27:49] So that puts you in a little bit of a box if you think the catalyst, the impetus is, oh, the company's not doing well currently, so now we gotta look at the people. You really have to have this point of view on people upfront at the beginning and start to root that out even when things are going well.

[00:28:08] Sean Mooney: Very well said. And it's a great way to reinforce in, in an upper down market. It's like just drive home. It's not just, you don't have to be declining to be bad. If you're in the oil and gas industry, you're in a down cycle. You're gonna go with the cycle, right? But it's how you do relative to your peers and what you could be doing in that cycle and so on.

[00:28:29] The upside as well, particularly in the upside.

[00:28:31] Lloyd Metz: Yeah. Success is a lousy teacher. Yeah.

[00:28:35] Sean Mooney: So it was interesting. So I was talking with a friend of mine recently who's a really successful, runs a successful public equity investment firm. And when he started off his career, he was right at a young age, was given a portfolio, a large portfolio with investment banking he was given to manage and he would come home every day.

[00:28:53] He is like, I lost like all this money, and he thought it was the end of the world and blah, blah blah. And he is just like beating himself up. But what he didn't know was. His portfolio was going down, but it was going down at half the rate of all the people he was working with. And his bosses were like, whoa.

[00:29:10] And then I was recently asking him, this is a bit of a side buzz that my son has expressed interest in investing. He has a little bit of like prize money, one from a science competition that he is gonna put to work. And I was like, had this really elegant, like diversified portfolio that I was gonna instruct him on.

[00:29:25] And I was talking to my friend, he's like, no, tell him, he can only invest in four stocks. Hope to God he loses every dollar of it. He goes, because he goes like, pain is the best teacher. And I'm like, you know, I like the way you think. I think this is gonna be a negotiation with my wife. But, but I like the way you think, kind of in a roundabout way is just like you said, like success is not, can cloud what you could be.

[00:29:54] Lloyd Metz: That's right. Was it haw? Asked the question about patients and this diagnostic phase. That's tension for sure, built in tension dynamic, right? Because we're on the clock, as we talked about in previous episodes, time IRR returns getting change in place. Faster initiatives take longer or get more time to bear fruit.

[00:30:18] So you wanna move faster in private equity and you definitely want to figure it out. I guess I try to push my portfolio management partners to figure things out fast instead of taking a long time to deliberate. Get the data, get the information, figure out sort of most likely causes, and then go test it, and if that turns out to be part of the problem, address it quickly and then go to the next one quickly.

[00:30:52] As opposed to taking long, drawn out, multi, multi-week, almost like consulting, like projects to figure stuff out. You can break it up into little smaller pieces, smaller chunks, and do the work, do the analysis, get it, forget 80, 20, maybe two thirds, one third kind of rule, and then test and go. And then go to the next and go to the next and start chopping the problem down that way.

[00:31:20] Yeah.

[00:31:21] Sean Mooney: Don't let perfect be the enemy of good enough, you know? That's

[00:31:23] Lloyd Metz: right. That's exactly right. It's funny. That is more rare than I would've thought. That thought. And I still do think that approach, when you'd say it at the board level, or if you say it at the C-suite level, I would think would be liberating, freeing, take some of the pressure off, but somehow more times than I would would like to admit.

[00:31:47] It feels like it doesn't. I don't know what's behind that, but. Telling people that you don't have to have the perfect absolute complete answer, but just get at it, experiment, tinker, try and come up with another approach. If it doesn't work, not everybody responds to that, and I'm kind of puzzled by it.

[00:32:06] Sean Mooney: Yeah, there's a lot that I think the kind of VC and tech world can and has learned from private equity. The one thing that I think that's, I think coming more and more appreciated from the venture capital world is this like fail fast, rapid iterations. Test and go, as you kind of said, like test and go test and go.

[00:32:23] I think there's great lessons in that and I think it's clear that when you do that, you end up being right. It's, it's a bit of a white knuckler, you know, in terms of you're like, oh, like grabbing your hand on your hand on the steering wheel, like you can see and print it at the end. But it, it works so well.

[00:32:38] So we'll bring the conversation to kind of full circle here. You've kind of done the diagnostic and you realize you're below full potential. And it just ends up that you might have a management issue. How do you get to that point? And then what do you do? Because that's the hardest thing. And that was always the moment where I would have like the sickest feeling in my stomach.

[00:33:02] 'cause that's the last thing you ever want to do, but you kind of have to do. And if you don't, you're doing a disservice to everyone else.

[00:33:08] Lloyd Metz: Well said Sean. Reputationally, that's private. Equity's go-to move, right? Firing everybody or firing people. But that's not our go-to move. We've talked about it. First step is support people, educate 'em, give 'em the resources, tools to go figure out and tackle the problem.

[00:33:27] But as we talked about just a few minutes ago, if the leadership is missing some of those key attributes, then you have to make a change, right? Because it does affect the broader culture and it does permeate throughout the organization, and it unfortunately can take a while to go find the right replacement.

[00:33:46] We've talked about this also in previous episodes. You have to be very intentional and very clear about, for any given role, whether it's CEO or Chief Commercial Officer, or CFO, or technology or operations, you have to be super clear and intentional about what you want that role to do and the person who's in that role, what you want them to do, and how do you want them to do it.

[00:34:08] And that can help streamline. A search process, whether you do it through an executive search or through your own network or your operating executive network for your firm, but I think that cuts a lot of time out of the process and also increases the likelihood that you'll get the right fit for the position.

[00:34:29] But generally, I think you gotta assume the better part of three to six months to get a full-time replacement in the seat. And the six months or so after a new executive is in seat, it's not just finding the bathroom, but it's building trust, right? They're in a new organization. They have to earn the trust of the people in the organization and that can take time.

[00:34:53] And that's a whole skillset in and of itself. Some people know how to build trust quicker than others, and, and again, that's part of what you have to, I think, screen for upfront when you decide to make a change. One of my board members, he, he has a belief, he says, no leadership is better than bad leadership.

[00:35:13] Right? So some people think that, okay, if someone needs to be swapped out, swap 'em out and find an interim. So that's where Sean, you come in, right? We often will call BluWave if there's nobody in our network that kind of fits the spec. And BluWave has been a great partner in helping us find interim executives when we've needed them.

[00:35:35] That helps close that gap between taking action when you need to and the three to six months before you find a permanent replacement.

[00:35:44] Sean Mooney: I appreciate the shout out there. Two of the top five use cases that we get called from private equity firms every single quarter are recruiters who are specialized in interims.

[00:35:56] And the point that you're making is a really good one is that you wanna fire as soon as you think it's appropriate. You don't wanna wring your hands on it. I think when you're doing that, you also have to have a very sober understanding of why a lot of times that leader failed because they weren't given the resources they needed.

[00:36:12] And so I think that's something, when you get to that point, it has also, it's a period of like open reflection of like, okay, what do we need to enable this next leader to be successful Because you don't wanna make this change again. And then to your point, it's, it's fire fast, but it's higher slow. Like get the next one.

[00:36:27] Right. And it's 4.1% inflation, like all time hot markets still. So it's gonna take time to get that next day leader. And so I do think a life hack is, is like have an interim ready so you can have someone kind of tending to the machine while you're getting the next best person in the absolute like highest probability way possible.

[00:36:48] In same vein, you can't wr your hands on that either. And none of this is easy.

[00:36:52] Lloyd Metz: Choose your hard

[00:36:55] Sean Mooney: that that's why it's not many people can do the the PE game. It's an endlessly fascinating business. No one would call it easy.

[00:37:03] Lloyd Metz: That's right.

[00:37:04] Sean Mooney: All right. Well this has been another, I think, really good kind of pillar of the challenges, the opportunities, the way of the, the private equity industry, and really appreciate you all kinda having a candid discussion on a, on a difficult topic.

[00:37:18] Lloyd Metz: It is hard. You can tell your friend when things don't go right, there's some steps to take and it's okay. Right. We all have these challenges, and that's part of the experience set that makes private equity a powerful force as not only investment asset class, but a form of corporate governance, right?

[00:37:40] Because not only are you bringing experience about an industry or business model, but do you have your library of mistakes, failure, shortcomings under resourcing, leadership teams, whatever it is. Situations where things went off the rails, you bring that to the table too, and that's part of what you're bringing to the companies that you invest in.

[00:38:00] Sean Mooney: A hundred percent. All right. With that, we're gonna bring another great episode to the close here and hope everyone has a great time as we kind of proceed through the days ahead.

[00:38:12] Doug McCormick: A special thanks to HCI Equity Partners, a lower middle market private equity firm focused on driving transformational growth through consolidation strategies.

[00:38:20] By partnering with family and founder owned manufacturing services and distribution companies, 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 ICV @ ICVpartners.com.

[00:38:44] 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. Learn more about BluWave at BluWave. Net for further information on H-C-I-I-C-V and BluWave and relevant topics discussed here.

[00:39:08] During, in the episode, please see the episode notes for links.

[00:39:13] 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. End. No representations, warranties, financial, legal, tax, or other advice are made herein.

[00:39:28] 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.