How PE Should Support Portfolio Company Acquisitions

Changes in the M&A landscape

I don't know if I've seen acquisitions themselves change over time, but I have seen the differences in what matters to family-owned private equity firms, publicly-traded companies and what has to get reported to the market. I’ve also seen high-growth PE firms and all they want is acquiring businesses versus ones that might be a bit more strategic. I’ve seen:

• what they acquire
• when they acquire
• when they take time off from acquiring and integrating businesses.

And seeing the use of capital, depending on the capital needs of the business, has been fascinating. But over the past decade, I haven’t seen differences in actual M&A, but I have seen based on where the money comes from the strategy changes.

Changes in private equity acquisitions

Today, what I'm seeing pretty regularly is, depending on the size of the fund and the size of the business itself, some just buy. Just buy and we'll figure out integration or we won't figure out integration, and that's okay. Businesses are operated independently, 

As long as it fits a paycheck that either the business can write or they can debt finance or they can infuse more equity into the actual business, then buy it if there is some relatability to the business. 

But I've also seen how people want to make sure that the strategy makes sense and not over-capitalize the business, and make sure to not breach any lending facilities to ensure that the long-term growth on an exit will create more value than just bolting on businesses. From what I've seen on that side, the integration is highly valued compared to where it has been at bolt-on companies and “buy them and we'll figure it out later.” 

Bring the integration and hiring integration specialists during the diligence process to help integrate a business on a post-close basis. To me, it creates more value. I like doing deals that create value, not just for the investors, but for the actual business and the customers and the stakeholders on the roadside. By leveraging the integration specialists, I've seen a lot more value on the backend.

I would say there's generally a greater emphasis on the ability to integrate the companies and capture those synergies from the integration. I've seen publicly traded companies operate like private equity firms to where you buy businesses and they're bolt-ons or they're loosely integrated, maybe financial systems, maybe HR systems, but that's it.

I've seen buyers walk away from private equity processes because companies aren't integrated enough and they don't want to spend the time and the money to integrate a business into its own entity because it's not integrated. 

It operates 10 or 12 separate companies owned by one parent company, which is a different target when you're on an exit. So one of the questions that we like to ask internally is: 

• What do we want to sell our business as down the road?
• How can we integrate our business now to get there in 3, 4, 5 years from now? 

Everyone's asking that question, but we're talking about it every time we have a deal on the plate.

I think it’s an opportunity of its own to buy a business like that. If that's your sole investment thesis, I don't know if you'll get the return that you want, but what you probably will see is that you will have faster growth on your bottom line because you can cross-sell better. 

You can have synergies with your suppliers, and you'll actually see the increase in margins because of that across the board. So whether that's your sole investment thesis, it's important for businesses on a long-term sustainability run.

I am not the master of integrations, but I am one of the drivers. We make sure to bring on experts in the space because we know that there is expertise in systems and how systems talk, and how companies work together as feeling and working like one company instead of just saying we're one company. And there's a feeling to it, not just a technicality.

• Can the IT system from company X talk to company?   
• Do the people actually know each other? 
• Do they work together? 
• Are they calling each other when they have a question when there's harm to the customer-wise office?

I think there might be an opportunity. You have five minutes. Just talk to him on the phone. And not having those connections on a personal level, you’ll lose opportunity. So building that has been interesting.

Go-to-market

Thinking about how the overall go-to-market will be integrated is important. There are different levels of the strategy that you assess when you look at an acquisition. One of them is:

• How are we going to approach a customer?
• Are we occupying more shares of wallet at the same customers we're talking to? 
• Or is this so adjacent that we won't be able to cross-sell and we're just entering a new market?

That might be the play depending on the size of the deal. But you can't really roll-up businesses in a completely new field unless you're buying and starting a whole new vertical that's targeting a whole new customer base. 

I like to make sure that we understand what we're getting into, whether it's a $15 million revenue business or #100 million revenue business. 

• What are we buying and how is it going to work with our current business today? 
• How are we going to work to grow it down the road? Because our resources are focused on growing our core. 
• Is this part of our core? Or is this so adjacent to our core that we're going to have two cores? And then you have to have a whole new thesis behind why you're buying it. 

We think about that probably from the first call with the management team. I want to have a high-level understanding of how this would fit with our business before I can bring it up the chain. I don't find value in coming to our CFO, C-suite, and CEO, talking to them about a business that’s so adjacent, it's just buying another business.

I want to know if my thesis has:

• cross-selling opportunities, 
• supply chain synergies, 
• has some sort of management leverage or new product that we can cross-sell over our current customers. 

I want to make sure that I have at least a high level thesis. Whether the technical parts work out, that's for our experts to determine down the road, but I want to have that thesis when I pitch it internally before we start spending more time on it.

I take a lot of ownership of that. I like to get C-level buy-in before we spend business unit leadership time because business unit leadership has a lot of commercial activities that if it doesn't fit strategically at a C-suite and potential board level, then I don't want to waste people's time on it.

I want to get that check mark before I approach someone and start spending time because to me, the next call would be about getting the business unit leader on the phone and have our C-level people in there too. We'll do an hour to learn more about these companies, dive in and we want to make sure that people's time is used wisely. 

So I try to own all of that initial work before spreading, unless they bring me the opportunity. If you brought me the opportunity, then I already have their buy-in at that point. And then it's just running it up the chain.

Deal origination

In terms of where we typically see most of our deals coming from, it’s split from up the chain and through our function. And I think it depends on PE involvement and the history of the business in M&A in general. 

Years ago we were sourcing our own transactions, jumping to publicly-traded companies where people were in the business for 15, 20, 30 years. 

• They have relationships with competitors. 
• They know their market.
• They already have regular touch points and you're just jumping into an existing relationship. 

If you're building a function that doesn't have a background in it, which not all of these PE-backed businesses do, you're starting from scratch. And the scratch isn't no relationships. The scratch is you leveraging the relationships that you don't know exist yet to have the calls that can get you a pipeline, to source you a transaction, and training folks and building muscle memory. 

• This is what we're looking for, help me learn about this market.
• Who are your competitors when you walk into a customer?
• Are any of them interested enough that there might be a unique fit?

Whether it's having more tools in our bag to sell to the same customer or a competing product or getting rid of a competitor, whatever the strategy is, building that muscle memory is important. 

I've seen it across the board on how you build the pipeline. I try to get my hands in the weeds no matter what, because that helps me learn the business more and helps me have a better conversation with a target, customer, management, and the board.

International deals

We've just closed a couple of international deals in the past year. We bought a company in India and a company in the Netherlands. It was my first time buying a company in India and it was very complicated.

There were local regulations that we didn't think about that just made it drag out. Like, opening a bank account took three months, it was some painful things to do. And we needed to open a bank account so we could transfer funds to our entity to actually be acquired. 

It was small things that dragged on the deal for a lot longer than I wanted. Whereas if you have an existing entity in India and a bank account, things get wrapped up a little bit quicker. So there were some things that were really painful, but I went to India for 10 days and it was one of the best trips of my life. It was awesome.

So to get back, I think it depends on what the business needs. I know a lot of people are avoiding the Baltics right now, just out of pure fear of the unknown, but other parts of Western Europe and other parts of Asia, Asia Pacific, Australia, I think people are hungry for deals right now.

PE firms on executing roll-ups

There are two different strategies that PE firms are executing on. One is the roll-up, which increases your core competency. If you can strengthen your core by rolling up competitors in the space, by rolling up complimentary products that fit into your core, then roll-ups are a great way to go. 

More share of wallet with your same customer base, maybe getting you into an adjacent space just because the products that you're already selling are applicable, but you didn't know about the market or you're learning more about the market. And you learning more about the applicability gives you more cross-selling opportunities, but there's also the horizontal move into creating a new vertical. And to me, that always depends on the size of the deal.

I'll give you an example. If your EBITDA is 50 million in the business that you're working for and you're buying a 4 million horizontal business, which would give you new vertical, I don't think that would really make sense and be worth your time because it's not big enough of a bite to chew to make a material impact on the business.

But if you're in the double digits at that point, and you're looking at a 10-20 million EBITDA business, that could create a new vertical arguably to me. And that creates a whole new level of value, depending on the end market and the customers, but both are important at this stage.

How PE firms look at acquisitions

There are a few different parts that are important to PE firms. You have your economic and financial variables, making sure that the business is healthy and growing and the EBITDA margins aren't decreasing the value of the portfolio company.

Having something that's either growing quicker, equivalent, or higher margin or a plan to get to a higher margin post-close with synergies is increasingly important. Buyers at the end of the day, when PE goes to sell, want to pay for growth and adaptability, and knowing that they have a business that's going to continue to grow, which is how you're going to get your multiple. So, not depleting your margins at the end of the day is important. 

Obviously, strategic fit. 

• How do the businesses fit together? 
• What's the story that you're going to tell? 
• What's the story now? 
• Does it actually make sense on why this business is important to buy or why this space is important to go into for the portfolio company?

And then you have your cultural fit. Make sure that there's cultural fit, because if you don't have cultural fit, at the end of the day, companies aren't going to work together well. And I've seen deals blow up and not get across the line purely because of cultural reasons. And I've seen deals post close blow up because of cultural reasons. 

I don't know if people are always taking it and giving the consideration that it needs. Sometimes you do a deal because you want to just get a deal done. But unless you're looking to change management and wipe the slate clean, having cultural fit is important.

Bad cultural fit

We did walk away from a deal because of bad cultural fit, and it was messy. You spend a lot of time essentially dating this company, getting to know them. And if you're post-LOI or pre-LOI, it's different, the relationships are different, the level of going under the hood is different. Post-LOI can get really messy. 

There could be views of breach of trust down the road, depending on how you relate the message. Obviously, you don't want to say “I don't see a cultural fit between us. I don't think this is going to work out.” But being honest is important too. Earlier, it's an easier conversation to have. It's easier to break off a relationship at that point but down the road, it can get messy.

I've seen personal lives that people kill up deals too. So we had a deal a few years ago where we were doing a background check on  one of the business owners and it turned out he had a criminal record that we didn't know about. And granted it was 15 to 20 years ago, but it got people a little anxious and fearful about doing the deal.

And there was a different personal issue of the guy that blew up the deal. To me, we had to get to know a little bit more since that happened, because they have a high impact on the deal. If someone's going through a divorce and they don't want to split the proceeds with a current wife, soon to be ex-wife, it can blow up a deal. So getting to know a founder or a CEO or management or whatever it is needed to make that final decision to close and it is important on the cultural level.

Spend time with them. It's like developing any relationship. Spend time with them as much as you can. Go to their facility, spend a week, and call them every day. Walks in the park, meals, dinners, get to know spouses, get to see them in their element .

We also walked away from a deal from bad culture fit post-LOI. The hard part about that conversation isn't just about how you relay it to the target, but it's how you relay up the board that you don't trust this guy, or you’re not getting good feelings from walking around the facility and seeing their interaction with employees and there's something that just stings your gut. 

Because a lot of it is a gut feeling, a lot of it is hard to measure with metrics. Unless you have a really high turnover ratio or something that's indicative of a cultural issue. But seeing it and smelling it and tasting it, it's a hard conversation to have. 

It's hard to relay it to a CEO who's really excited about a deal. And if it's in my opinion that it doesn't make sense after that kind of assessment. 

I try to encourage the CEO, getting to know them at that kind of level too, not encouraging the negative, but encouraging and forming a relationship. It’s important because on a post-close basis, depending on the reporting structure, you need to have that interaction. So, it's hard on all levels.

Relationship with PE firms

As a corporate development leader, my relationship with PE firms varies highly. In general, it felt supportive. But depending on the trust from the private equity firm to the actual portfolio company, there can be a lot of distance in between conversations. 

There can be a lot of distance in terms of help. So I've seen highly supportive, weekly or biweekly, or every other week calls down to monthly or even less, depending on the M&A environment and the environment of trust in general.

To me, with the way that I've seen the relationship and how I've enjoyed the relationship is through frequent touch bases. It's hard to have a connection without it. Even if it's for 15-minutes every week just to catch up on things that are moving, I found that to be the most supportive environment versus the “Okay, M&A is a little slow” or “We trust you. Just let us know when you have something M&A to talk about.” Because everyone wants to know what's going on at the board level M&A-wise. 

So having frequent touch points:

• helps create more trust
• helps create more transparency
• Helps floating ideas go across.

The more frequent the touch point, the better.

Ideal PE-sponsor relationship 

There should be a balance for any relationship right there. Their job as the PE firm is to maximize shareholder value in the long run to make sure that they can get a good exit. And my job is to make sure that the management's working together to build the company with the vision and thesis of the private equity firm. So making sure that all hands are aligned whenever we do something is important. 

To me, the best cadence is either weekly or every other week touch points with formalized meetings and agendas to walk through everything that's live on the table, and pipeline down the road. 

• Making sure that we're aligned on strategy
• Make sure we’re aligned on execution
• make sure we're aligned as things are getting more real
• Make sure that we have the right resources involved and the approvals that we need to have the conversations that we need internally and with targets, stakeholders, and third parties.

What I find valuable is that when things get overwhelming, private equity understands M&A. My job is to be an extension of them. Essentially, they want to buy more portfolio companies and they want to trust Corp Dev with growing their PortCo with M&A. 

But when things get wild on the PortCo side with too many live deals, they jump in and help. And to me, that's been helpful. We actually had that in Q3 of last year where there were just too many live deals and they jumped in and they helped get a couple across the line. And it was incredibly helpful. They didn't even ask, they just jumped in as they could see that we were drowning there. Having that kind of relationship of “we're here to help” is important.

Managing deal sourcing conflicts

I've had deals that we've really rallied for as a company and as a leadership team, that private equity did not want to support but wanted to give us the motivation, encouragement that they will support us doing deals. It gave us the leniency to chase. 

Being an advocate, but being realistic and creating boundaries is important. If you don't want people poking their head in this adjacent space, let us know so we don't spend time on it. And by us, I mean whatever the PortCo is. 

I've sourced transactions before that turned into new PortCos for the private equity firm. Whether that's helpful or not, probably. We're making the introductions. We're giving them the download of an interesting opportunity. But staying out of this sector or this industry, the earlier that they can let us know is always best.

Approval process

I've seen the approval process as highly formalized, where they want really highly-sought-after pitch decks that break down every level to just put together a one pager. And we can move forward at least with an LOI at a strategic level. 

They're looking for a higher level of diligence because of that, the cash is all coming to the bottom line. Your net income per share is what's going to be relayed, not just your EBITDA. But on the private equity side, anything is gamed depending on what they want to spend time on. So learning that upfront is important.

• How formal it is
• how much do they want in initial phases
• what they want to learn down the road

Everyone has their standard diligence items that they're looking to track upfront and progress throughout the close of the deal, and they're all close, some value some items more than others. So having clarity around what's valued and why is important, but they all want different things.

Sourcing

Mostly, from what I've seen, there's a higher reliance on banker relationships for acquiring portfolio companies. Whereas it's only the smaller investment banks that will represent what a typical PortCo would acquire. 

If you're not a multi-billion dollar PortCo, and you're in the middle market, a few hundred million of revenue range, you're looking at only a few investment banks that'll represent the tens of millions of revenue businesses to get deals done. So at least on the corporate development side, you’re more reliant on relationships. 

It's a lot of relationships: relationships with the owners, longevity and an actual business trade show, who's putting up a booth and getting to know people on that level versus going out to meet investment bankers at different networking events like JP Morgan.

Sustaining support from PE firms

In terms of the support from the PE firm, it's a mix. If they're bringing in a corp dev person, they want acquisitions and in order to do acquisitions, you need a pipeline. You got to show your value and that you can get stuff done, but it depends on what they're looking to do. 

Each private equity firm has their own resources and each one will give you access to what they're comfortable giving you access to. And by you, I mean, the corp dev person. And there are a lot of great resources out there that I'm sure you've seen that help diligence companies or markets or getting details on companies to narrow down opportunities. It’s helpful, but also building a resource bank of internal exports, which could be on the board.

It could be third parties that they trust. It could be whatever they're comfortable with. I've worked with private equity firms that don't want to spend money on third parties. They don't want to pay banker fees. They don't want us paying banker fees. So we can't reach out to third parties to help us source deals.

And I've worked with ones where a deal is a deal and that's a one time fee, so we got a pipeline built. And depending on what the appetite is, it’s all about communication. But understanding what the boundaries are that I as a corp dev can work within is crucial. 

I can say that we've had a lot of resources in New Mountain Capital. Building that pipeline is important. I started here about a year ago, and it hasn't stopped the trajectory of the pipeline-building, the sourcing. There's a lot of activity going on because we're spending time:

• building relationships
• getting to know companies
• exploring new industries and adjacencies that help build our share of wallet for customers

And it creates opportunity down the road. Whether we want to do a deal now or in a month from now, we have opportunities because we're spending the time and energy building a pipeline.

How the support continues from sourcing to integration depends on the preferences of the private equity firm. Some of them like being involved in managing third party advisors, whether it's their relationship or the company's relationship, something they like to be involved with. 

They want to be involved with your financial advisor, tax advisor, even your legal advisor. And depending on what they're looking to be a part of, whether they want to manage the relationship or just have the option to join a call that's happening or just see the diligence output down the road, it's all going to be different based on the level of need of that firm and the reporting structure with it.

Reporting structure

I've always had regular touch points with the PE firm and regular touch points with the C-suite at the PortCo. I'm an employee of the PortCo. I have a formalized reporting structure, currently up to the CFO. In past lives, it was up to a CEO, and I phrase it as a dotted line to PE where I have weekly calls with the private equity firm as just a catch up on how things are going. But anytime I have a question, I pick up the phone and call them. Having that open line as needed is helpful, but it's more of an informal dotted line reporting line to them.

We have formal M&A calls with them every other week where we give them a full download on everything that’s happening M&A-wise. It’s my job and the rest of our M&A team and C-suite to deliver that message.

From what I've experienced, a lot of regular touch points between the C-suite at the PortCo and the board or the private equity firm, there's always interest in live transactions. So whenever there's something live, making sure that those to whom I report have the knowledge to relay the correct messaging and next steps and where we are with various levels of activity is important. 

Keeping the PE firm on my own terms with an online call or one-offs, making sure that they have the knowledge is important. But my job is to report everything up the chain to RC level to give them the tools that they need to report to the private equity firm. At the same time, I have a dotted line to the PE firm as well. 

There's no formal reporting structure, but we get on the phone once a week to catch up, making sure that if I have any questions or they have any questions, it gets answered. Because they're reporting up at the PE firm as well and they're going to get asked by their superiors about how the M&A is going on at ex-PortCo and make sure that they have the knowledge that they can report up as well. 

There are two kinds of levels there, one is more informal and one is more formal. But not just pipeline live transactions. And then how are the integrating businesses or integrated businesses performing on a post closed basis and giving them that weekly or bi-weekly or monthly knowledge that they need to report up their chain so they can have great outcomes on the deal.

Advice for PE firms in supporting portfolio companies

My advice would be, just like getting any other deal done, more frequent communication is better. Whatever the relationship is, the more frequent the communication, the better. At least, especially in the early ages, when you're trying to build the function and create the boundaries around:

• how the function will operate
• how it will report what you want it to report
• how it will actually conduct M&A

Because I've seen times where the PE employees feel like they're being overruled by the CorpDev folks. And I've seen relationships build or need to build a bridge to try to fix and repair some hurt ego on both sides before.

So, there should be frequent communication and the understanding of working together to build a team. Know that you're going to tackle deals together and what CorpDev and PE is going to handle and how we're going to work together when we get to deals. If we have one deal, it's going to change if we have five or 10 deals, but having the relationship and having frequent communication is important.

I don’t feel overly-policed by the private equity owner, but I have felt that sometimes the amount to report might be overwhelming, depending on what’s going on. But I’ve also seen PE firms acknowledge that we have a lot going on and tell us that we don’t have to report all of it, but just tell them specific things they want to know.

And again, it's about having an open relationship where you can raise your hand and tell them when you got too much going on. You may need to skip this meeting or you can give a shorter brief on what's going on or you can ask help with something. Because there just isn't enough time of the day to get stuff done. Focus on that relationship that you build with PE because they're important here.

Advice for Corp Dev Leader under a PortCo

Be open, be honest, be vulnerable. You're going to be thrown to new things. Raise your hand if you want advice. One of the early pieces of information that I had, I would have one-on-ones with one of the partners at one of the private equity firms and ask for help on sourcing and pipeline development. 

I didn't realize that they, at least on the PE side, have to source their own deals too. And they're measured based on their deal flow, their pipeline development skills, and being able to generate a pipeline, not just company performance, an exit value, and return on investment, but actually be able to bring deals to the table. Don't be shy to ask for help.

Staging productive meetings

When it comes to staging meetings, it all comes down to being open, vulnerable, and transparent, whether it's up front in the interview process or after you've been hired. Because you weren't sure how to go up on a touchy subject, but be honest and listen.

My level of working with this skill set is this:

• How can I leverage you to help me get better and improve my skill set?
• Can we do weekly calls for 30 minutes? 
• Can we do bi-weekly calls? 
• Can I work with your team members on leveraging these resources or those resources?
• What resources do you have for me to leverage? 
• How can I work with you to help me do my job better? 

And they'll tell you what the opportunities are. They'll tell you if they want to give you time. They'll tell you if they don't have time for you. Asking for what you need I found is useful in all aspects of my life, not just work. It is going to help leverage that relationship and give you the tools to succeed in your Corpdev role. 

Internal reporting structure

I report directly to the CFO with a dotted line to the CEO, and it's a dotted line because I'm not a formal report. But everything needs the CEO sign-off, not just the business unit leader sign-off before he goes to the board.

So for me, I like to make sure that they both learn about M&A opportunities at the same time and bring it to their attention, whether it's an email or a phone call or 15 minutes to a team's meeting. 

We have this interesting call, creating a more formal meeting with actual business unit leaders. But our job as corp dev is to:

• support the growth of the entity
• making strategic decisions
• helping analyze opportunities
• getting company alignment
• presenting it to the board where we think it makes cultural, economic, and strategic fit
• making sure that you have a good relationship with the C-level, executive team, for why deals make sense.

I'm in full support of deals that make sense. We can work with the people who run it today and we can really blow this market up with these resources. It's all about the story. Everything working together is important. And when you have that feeling that this is a superpower to have and we need to buy this, it's a home run every time.

Keys to pitching a deal

There are a few different parts to it. I'd work with the team on who relays the strategic message for why a deal makes sense. Knowing your audience, which is the board or the PE firm or your M&A team or whatever you call them, and knowing who internally can relay the why for why the strategy makes sense. 

It's not always the CEO. It's not always corporate development, but from my experience, it can be the specialist in the field, whether it's the business student leader or the head of sales or whatever the commercial arrangement is. It's finding the right person for that opportunity, who can really tell the story of why a deal makes sense and leveraging their expertise for that part of the pitch. 

The rest of it is just data. You lay out their financials, you lay out your thesis, how you would roll it up or share resources or synergize. That’s all. You read and you have follow up questions, but the story itself is important because it's going to change the shape of the future of the business and making sure that you have the right pitch and the right pitch person can change the trajectory early up front.

I’ve seen it differ in different private equity firms when it comes to their level of support.

• Some of them like to know that you can cross-sell or your financial systems are talking
• Some of them want you to get a third party advisor involved
• Some of them want to hire a resource to dedicate to integrations. 

It depends on what the goal and the thesis of the private equity firm is. I spoke with the private equity firm a couple of days ago and they didn't integrate businesses at all once they acquired them. They would do deals to build up the PortCo and then sell it. And the next buyer would focus on integrating potentially and acquiring new entities.

Depending on what the goals of the next exit are, the levels of integration differ. And the different levels of private equity based on their experience, they understand this. And you'll see it depending on what they do with their current PortCos, asking about an interview process about:

• how they integrate
• what kind of integration they're looking for
• what they're looking for on an exit

In general, we'll give you that view about what they're trying to do with the business, but I find integration to be highly time consuming, and incredibly value-creative if it's done well, so the time is worth it if you can do it well.

There’s probably a maturity curve for that private equity firm on how they view that approach. It’s all resources. Their primary job is to spend that fund to make sure that they can get the returns for their investors. Some of them just focus on that. Spending the fund. 

They’re smaller, less resources. They don’t have levels of associates and analysts that can dive in and work with companies on how they’re integrating, why, and what the outputs are going to be. Some of them don’t care from what I’ve seen. They just want to know that you can cross-sell and you can roll in the financials and put together a package on an exit, so I think there is some sort of maturity curve.

You also know when to pause certain capital activities to focus on integrations. This has been a heavy year. Let’s take off six months, make sure we integrate, make sure that we can go to market as one entity, not as two or five entities. I'm approaching the same market. Let's spend time focusing on that, and this little sophistication, which comes down to typical size and where they spend their own time.

Approaching target company relationships

I try to build my relationship with the target company so that we create a personal relationship depending on nothing. I want to make sure that I get to know the people who own the business or the CEO, if it's not the owner, because deals don't always happen now and having someone that I can call in three months or in six months or in a year from now, or send them an email and know that they'll respond or pick up the call or respond to my text. 

To me, there's more value in building that relationship for a no specific time period versus when you just go in because you purely want to buy their business. If I really want to buy this business, I want to get to know them as a person and get to know how that helps check that cultural box to see the fit. But it also helps you reach out when there might be better timing. 

People don't always want to sell their company to someone just because they have a checkbook. They want to make sure that their legacy is going to be continued down the road, that their employees that they've had for the past 15 or 30 years are going to be kept.

They want to know that they can trust and they want to work with the people that they're going to be getting in bed with, because this is a lot of these folks, their legacy that you're buying. So having trust in the relationship goes a long way.

Collaboration

I'll give you a couple examples. I bought a business from a founder a few years ago. The guy had started the business in the sixties. He sold it to me in ‘19 or ‘20, and the guy had to run it himself. He had a couple of tenants and his plan was to walk away after he sold it. And by the end of it, he was sending my kids gifts in the mail. So we built this level of connection that whatever I needed, he just wants me to let him know and he’ll do it for me. 

But I've also worked with targets where they are only willing to share a certain level of information, and that's all you're going to get. And to me, that shows a level of cultural fit because when I want to spend not just money, but time for myself and my colleagues and my team to learn about and dive into a business, we want to make sure that on a post-closed basis, we're going to like working together. And that’s a red flag cultural-fit wise that they're not going to let us fully under the hood. They're only going to lift a part. 

Whether they're hiding things or not having enough trust or they just don't want to show you stuff because they  don't want to do the work, I don't know if it's going to work. Those are red flags. So the better the connection, the easier it obviously is to get done. But when you're working directly with the founder or CEO or family that's selling the business, the better the relationship, particularly the better the outcome.

Managing underperforming acquired companies

There are a couple of different outcomes. One is they hold it longer until you are growing it to meet the metrics or they could sell it at a lower multiple and just try to get out. I can tell you from the PortCo side when we've acquired businesses that haven't performed according to our initial estimates, or even our pre-close estimates with an updated budget and performance.

And it's all about: What are we going to do now? And coming back with a plan for how we're going to turn things around. It might not be in six months, but it's probably going to be in the next year or two. 

• What's going to change in the market? 
• Why is it going to change? 
• How are we going to do differently?
• What resources are we going to allocate? 
• How are we going to cross sell or market differently? 

Coming up with a full plan for this new business is important.

PE firms buying other PE firms

I've seen PE firms make investments and funds of PE firms. Remember seeing a couple years ago that a smaller PE firm was bought out by a larger PE firm and they just bought the whole portfolio. I don't know enough about that to really comment on. 

I think you're entering in a whole new level of risk, a portfolio of businesses. It's fascinating though. If you're a mega fund and you just have 10 billion that you need to spend, you buy a middle market PE fund that's got 5 billion under management. That's a unique return potentially. 

Buy them all at once, see what happens. It changes a lot of relationship dynamics, which you don't know how PortCos or your investors are going to react. 

I can foresee a lot of challenges there, but from what I've experienced, sometimes mega funds will invest in funds of middle market PE firms as a way to diversify. And that's interesting, depending on the relationship and the access to opportunities. You may have reached into pockets of other private equity firms and their resources and lots of potential leverage.

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