Scaling Through Strategy: A Buyer-Led Approach to M&A Success

Scaling Through Strategy: A Buyer-Led Approach to M&A Success

Kison: [00:00:00] I am Kison Patel, and you are listening to M&A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M&A deals.

Kison: Hello and welcome to the M&A Science podcast. This [00:00:30] podcast is part of a mission to rethink how M&A is done. The old school settle led approach, it's dead fire led M&A is all about strategy, alignment, and efficiency. Putting value creation at the center of every deal. Let's be real. It's not about closing the deal.

Kison: It's about making it successful. We uncover what truly works in M&A by learning directly from the best. I'm your host, Kison Patel, founder and CEO at deal room and Chief Scientist at M&A Science. Joining me today is Larry Hartman, [00:01:00] CEO of ZRG Partners, one of the fastest growing talent advisory and executive search firms in the industry.

Kison: Under Larry's leadership, ZRG has expanded significantly through a combination of organic growth and strategic M&A. All while pioneering data-driven solutions for talent acquisition. Before his ERG Larry co-founded Rockford Industries, where he scaled the company, took it public and sold it to American Express.

Kison: Today we're diving into how to align M&A with a buyer [00:01:30] led framework, build scalable growth strategies, and create meaningful long-term value post-acquisition. Larry, how are you doing today? I'm doing great. Good to have you here. Hey, thanks for hosting Live Manhattan, baby. This, yeah, this is where it's happening.

Kison: Absolutely. Thanks for making the time. I appreciate it. Yeah. Good to be together. You wanna kick things off a little bit about your background?

Larry Hartman: My background is maybe a little bit unique. I'm a two time entrepreneur, and started two businesses from scratch. You alluded to it in the bio. My first business, I started right outta college in the financial [00:02:00] service space.

Larry Hartman: And one of those things you. Probably would tell someone never to start a business without knowing what you're doing, without any capital. But that business we grew, we got it to about 80 million in revenues 10 years later from startup. We had a dream to take it public. Back in those days, there was not a private equity market like there is today.

Larry Hartman: So that was how you could get capital. So we did an NASDAQ offering after that, scaled it to a couple hundred million and successfully sold it to American Express. That was. Chapter one of the story. So saw [00:02:30] interesting capital formation and. Being bought and seeing M&A from the version of the other side of the equation.

Larry Hartman: And then my current endeavors started ZRG 20 plus years ago, and again, started a business that has grown from zero to today. We're about 280 million, 650 employees around the world. We're in our second round of private equity, and it's been a lot of fun. We've grown organically, but we've also done, I think, 17 acquisitions in the last four years.

Larry Hartman: So we've been very active in the M&A [00:03:00] markets.

Kison: You know, the first time is like you hit the strides of the American Dream and that wasn't enough. You, you did a sequel to it?

Larry Hartman: Yeah. After I sold the first business, I retired for about nine months. I golfed every day. I thought my handicap would get better.

Larry Hartman: It didn't. And I had three kids at home and my wife thought the idea of me retiring and golfing and her raising a family was not a good one. So I had to get back to work. It just wasn't gonna work at that stage. It was nice to have a little break, but it's fun to be in the action, fun to be growing things.

Kison: How'd you do things different the second time around? Did you do a lot of acquisitions on that [00:03:30] first platform?

Larry Hartman: No, we didn't do any. The first platform was all a hundred percent organic growth, all through hiring all North America based. Then it was acquired, and then as part of American Express, we did a couple of add-ons through American Express.

Larry Hartman: But my first business, no. And in hindsight, I wish I would've, I wish I was smarter and wiser in that first round. It would've accelerated growth, I think, in a bigger way.

Kison: Well, you went through the experience of an exit with American Express, which is another pretty monumental experience to go through. Has any of that experience like [00:04:00] helped shape the approach that you take when you do acquisitions today?

Larry Hartman: Yeah, it helps us convince people. To not be bought by a strategic to be bought by an entrepreneurial based organization. So we buy a lot of, call it boutique professional service firms, whether they be exec search firms, consulting firms, interim firms. The common denominator is usually the founders built it, got it to a certain point of scale and weren't sure what to do next, and they needed capital to grow, bringing them in.

Larry Hartman: They are joining an entrepreneurial culture. So me knowing what it's like to [00:04:30] be acquired has helped. And when American Express bought my first business, I. I knew pretty quick after that I had a job. I was a cog in a wheel, and I had a job. When private equity buys your business, it doesn't feel that way at all.

Larry Hartman: You now have rocket fuel to take the next steps, and you still have skin in the game because you're perpetually rolling equity and they're always wanting to know you have financial skin in the game. So it keeps the adrenaline going. It keeps it for entrepreneurial minded founders. It's a great way to take money off the table, but still [00:05:00] have that enthusiasm.

Kison: Can you teach me? So if I'm in a pro looking at a target and it's competitive and I got my big strategic competitor looking at the same target, how do I convince the seller to sell to me as the entrepreneur over the big strategic,

Larry Hartman: there's a couple things I would jump to on that. So one is I. If you're buying 'em, that's not the end of it because they're rolling equity in you and that equity in you is gonna have a compounded effect that's gonna have a lot greater outcome than joining some big place that maybe assist, again, just a [00:05:30] job with a bonus.

Larry Hartman: What we sell entrepreneurial businesses on, and most deals we do have 25, 30 5% of the deal structure is stock. We say, if you took a hundred percent of my stock and you didn't grow at all because I'm growing over the next five years, you're gonna get a five x return on that stock. It's the multiplication of if you do nothing different and I grow, you benefit from that.

Larry Hartman: Now, we don't expect them to do nothing, but we expect our growth to lift up their piece. So a strategy can't sell that vision. The financial side, you can come up with a [00:06:00] pretty compelling case. That by taking equity and something early on, the returns could be a lot bigger. And then the cultural aspect, entrepreneurs, they haven't seen what big matrix organizations feel like they need to understand what that's gonna feel like versus working in a place like you would offer where it's more nimble and

Kison: fun and enjoyable.

Kison: Okay, so we got two parts. There's the second time I bought an apple. Yeah. And then the culture piece. Second, buying the apple is pretty straightforward. It's a financial picture. Second or third bite of the apple. [00:06:30] Yeah, exactly. I mean,

Larry Hartman: no, we're in our second round of private equity. We'll sell again at 12. 12 of third buying.

Larry Hartman: Yeah. Yeah. That part you're always

Kison: there. There's always more. Because some of the businesses I'm looking at, they're pretty stagnant. Yeah. So we're growing. So it's almost like you have a high chance of second buying the apple. Yeah. Total picture is gonna be growth. And we're trading at a high multiplier. Yeah.

Kison: 'cause we're in the high growth category. I can see that being a favorable pitch and I think rolling over the equity, there's some deferred tax benefits as well for sure. The culture piece. Let's talk more about that. How do I click in there? They really distinguish the [00:07:00] difference. I get it. It's like you could go to a large corporation and you're gonna get your title reduced and you know, follow a bunch of bureaucracy.

Kison: Yeah,

Larry Hartman: I'm able to sell it 'cause I firsthand experience it. I can share my experience of what it's like and it was great financially, but I had a job and I never wanted a job. I was an entrepreneur. I served out my time and I knew at the end of my. Three years. That was gonna be the end of that chapter.

Larry Hartman: With private equity, you get the same adrenaline every day to build something with the same rewards. You're taking some risk off the table. I always tell the entrepreneurs that, you know, [00:07:30] if you like being in the market and growing, we'll take HR, IT, accounting off the table for you, and we'll give you a chance to focus on the parts of the business you really like, and that's growth, innovation, whatever that might be, that business brings to you.

Larry Hartman: They're selling the lifestyle, finding people that buy into that, and then it's finding people that don't wanna just cash out and leave. If you wanna cash out and leave a strategic's, probably the better bet. If they're not hungry and they're tired at the end of their cycle, then it's not a deal you want to do.

Kison: Some of the deals I'm looking at are [00:08:00] that person at that end of their career cycle. Yeah. Where they're looking to be fully retired the next year or two. Yeah. You just stay away from those deals altogether because, well,

Larry Hartman: first thing I'm telling people is you should sell your business five years before you wanna retire because I need you here.

Larry Hartman: We're in a business that. The people matter quite a bit. We're not buying a revenue stream that exists outside of a founder typically, so I think there might be a difference

Kison: because I'm looking at software companies where they're sort of material to the operation and maybe the direction of the [00:08:30] technology, but I can see us building a succession around that in the next year.

Larry Hartman: You can get a founder to stay longer than you think. They start always when we get 'em, I wanna leave in a year for this structure. We're gonna need you for two years and we need another year. As a senior advisor to the business, you know, structuring in such a way that they're gonna be there to support the business, at least to take emails and calls that come in latter parts because they are rolling equity.

Larry Hartman: They should have interest in it. Yeah. It also, the other benefit, it locks 'em out on a non-compete for a longer period. There's [00:09:00] people that say they wanna retire and then they get bored. And you don't want to have a competitor popping up in your space. So to me, the advantage, thinking about those founders, time in for a period of time.

Larry Hartman: We always tag on a period of a senior advisor period, and then a non-compete at the end of that so that we're not running into somebody that we've made them rich and now they're taking market share from us three years later,

Kison: keep 'em on for one to two years, and then senior advisor for another year or two, and then add the non-compete at the end of that, and then the non-compete.

Kison: Yeah. Okay. That's fair enough. When did [00:09:30] M&A become part of your central strategy over at ZRG? We did our first private equity

Larry Hartman: raise 10 years ago. At that point, we were small, $10 million revenue business vision to grow. Brought in a firm called North Creek Mezzanine, who brought in some debt and equity.

Larry Hartman: I bought out a partner and the vision was invested to Grow. We went from 10 million to 40 million all organically hiring. So no M&A. We did one deal. Which actually was a pretty good deal that we did. And then the second private equity sponsor, RFE Investments, their [00:10:00] thesis was, yeah, you've done a good job growing, but we're gonna want to put some gasoline on the fire.

Larry Hartman: And we believe in M&A. We're gonna want to take what you're doing and go harder and faster. They came along and said, we're gonna help you build the M&A engine. So it was, we need to find an M&A ready CFO. Eventually we're gonna build a corporate development team. They've been supportive of saying, if you're gonna do it.

Larry Hartman: Three or four deals in a year, you're looking at eight or nine at any time. It's a real commitment of expense. So that's been the last [00:10:30] five years with rfe. We've done 17 acquisitions, but we built a machine that can handle it. That's been part of their strategy. So it depends on, you know, who your buyer is.

Larry Hartman: If you're selling the private equity, what's their strategy and where does M&A fit? We're getting

Kison: interest from private equity firms and its first taste to blow them off. Now I can see us wanting to incorporate M&A and that we should probably get a good partner. If we found the right partner, we could probably grow twice as fast, get twice as far in the same period, looking at what's ahead in the next five years.

Kison: So now [00:11:00] it's taking the conversations and dating these PE firms, and what I'm realizing is they do have different capabilities and how they can support you. Some are more focused on organic growth, some are more focused on acquisitions. A hundred percent. Now I've been trying to dig in and see how well they can support those inorganic crop opportunities.

Kison: Can you maybe tell me a little bit about your experience around that? You mentioned getting the CFO with M&A backgrounds, building out a corp dev team. How was that support? Because it sounds like you did the one deal before, but now it's, no,

Larry Hartman: We did a deal or two and then early on we were doing deals with just myself and [00:11:30] my, call it controller and their help, and it's like, no, we need to build a team that can support you.

Larry Hartman: It's too much work for modeling and the different things we have to do. They were just supportive of, let's go do a search for a. CFO with deep M&A experience and then building on top of that. It was a year later that CFO had enough on his plate that we needed to have a head of corp dev to do all the financial modeling of all the deals coming in.

Larry Hartman: So again, when did a search bring in a corp dev guy who got a support person? I think it was their commitment to being willing to hire [00:12:00] the team to support what we needed when they say we want to do M&A i. I'm in your shoes. I would say that's great. We're gonna need to make sure we bring in an experienced CFO and if it ends up being a big part of our strategy, having an internal team, or there are ways to do it with external partners.

Larry Hartman: We still use partners, we certainly use accounting firms for due diligence and, and law firms for legal diligence and, you know, market research firms for studies sometimes, but we're driving the work to get to that point on serious deals.

Kison: They help you recruit the [00:12:30] team to scale M&A as your capability in the company.

Kison: Is there anything else they help to dial it in, in terms of helping you get better at doing deals? For sure. To

Larry Hartman: me, the advantage we've had with private equity is that I haven't had to think about capital. So we've been through a couple different cycles. Our firm invested, they ended up, we brought in a secondary private equity firm two years ago.

Larry Hartman: We did a continuation fund. We brought in Timber Bay Capital, who brought in a significant amount of additional capital. And then most recently, [00:13:00] our bank, maybe a year ago, felt like, okay. Banks in the US were a bit not very friendly in terms of lending. And they're like, we think you've probably done enough for this year.

Larry Hartman: And our PE firm was like, no, we're gonna do more. Let's go do a private credit rate. So they drove the process to bring in a banker. We did a private credit fundraiser, and we ended up getting four offers. We raised 120 million with Main Street Capital for growth in M&A. They've had the direction of where to go next to keep [00:13:30] the fuel going for M&A.

Larry Hartman: That to me is you say support from a private equity firm, and they've been very proactive at making sure that we had the checkbook to be able to buy the assets that we wanted to buy.

Kison: That's a lot of support and it's just your capital structure. Yeah. I. Going back to the retaining founders post acquisition, what are specific structures?

Kison: 'cause you mentioned giving them some rollover equity, 25, 30%. Is there anything else that really incentivizes a founder to, to stick around and be committed to [00:14:00] growing? Almost every

Larry Hartman: deal we've done has cash. It has stock as an earnout. Earnouts are typically three or four years. They're based on. Growing from a baseline number.

Larry Hartman: So that helps. We use employment contracts to lock people in and there are times when we have really important founders who we need to make sure they don't decide they wanna retire, that we will actually put in a. Penalty clauses into the employment contracts that if they were to leave before that, they're indemnifying us from any [00:14:30] decline in business.

Larry Hartman: So they literally can't leave. There are times we're saying, no, we're gonna make sure you're here. You're committed to the four year term and you can't get tired in two years, decide you wanna retire because I'm buying you based on you being here for the four years. So we've been sometimes pretty prescriptive in terms of employment contracts when a founder is critical, where.

Larry Hartman: If they were to leave, they can't really leave without a financial penalty or giving back proceeds or doing some things.

Kison: You have both the earnout and then rollover equity and for cash and some penalty [00:15:00] clauses sometimes. Yeah. There's some penalty

Larry Hartman: clauses too. Yeah. We don't call it that when we're talking to the founders, but it may be that sometimes it's specific clawbacks of cash on a pro rata basis if they leave before the end.

Larry Hartman: Other times we've used. Indemnification language that should you leave and the business suffer, that the valuation change from you leaving, you're indemnifying us from that. We've had it where a founder says, I wanna leave, so that could get costly. Do you understand? If you leave and the business drops, I bought the business based on you being here.

Larry Hartman: That wasn't part of [00:15:30] the deal. Locking in founders on professional service firms that are relying on people is pretty important. We paid a lot of attention to it.

Kison: What does that structure end up? Can you have 30% in earn out, 30% in rollover equity, 40% cash? Or is it different? Varies. Yeah, it varies. We've done 'em

Larry Hartman: from 50 25.

Larry Hartman: 25 sometimes. We've done more cash sometimes during the pandemic. Back to one of the really interesting deals we did, we bought a sports recruiting business called Turnkey. Turnkey had a really cool business that did [00:16:00] professional sports recruiting and it was three months after the pandemic and nobody was in, if you remember that time, there was nobody in sports arenas.

Larry Hartman: There was nothing on TV there. Yeah, they were pretty concerned like, what's the future hold? How long does this last? We felt sports was probably not going away. We not that difficult to leap to, to guess that, but. We bought that business and we did, I think that deal, 70% stock. We were at a point where we were a little bit conservative ourselves, still was an uncertain time, but we did a heavy stock deal.

Larry Hartman: Now that founder, that business [00:16:30] has since quadrupled, we're the number one player in sports recruiting right now in the pro, in the college ranks. It's a global business now, but we were conservative. He took a gamble. He'll be one of the biggest recipients in our next recap of proceeds. 'cause he took that risk.

Larry Hartman: It'll range on timing, circumstances, risk.

Kison: That's a, you know, it's an interesting deal because it's one you're looking for very long term. Yeah, because, and everything was chaos at the time, near term. And you're right, nothing's happening. No events are happening.

Larry Hartman: No, it could have been a year, 18 months. Who knew?

Larry Hartman: Go [00:17:00] back to that time. It was,

Kison: was it like the terms really too good to make, you know, for forego or it's like, ah, they're in trouble, like we're gonna, no, it wasn't

Larry Hartman: just, he'd been through a few cycles and was tired of the cycles and felt like. Again, the reasons to join our platform. He wanted to do more, but was tired of putting his own cash into growth.

Larry Hartman: That business, literally we've quadrupled in five years. What he wanted to accomplish, lend the founder, was to grow the business, make it global. We built out Europe, we built out Asia, we added college sports on top of the [00:17:30] work he does in pro sports. For him, what he wanted to accomplish, we were willing to invest in.

Larry Hartman: So you

Kison: supported it with the capital to help him execute this plan. He had a rollover equity, I assume, and he's got, yeah,

Larry Hartman: and that one again, we, we wouldn't wanna do a deal with 70% equity like now. Our private equity group would say 25, 30 5% max because it is dilutive

Kison: right

Larry Hartman: to us. We'd rather give cash. In those days, it was kinda like, let's hold on to cash, because we don't know how long it's gonna be till companies are back in an aggressive hiring moment and ended up coming back [00:18:00] pretty quick.

Larry Hartman: So we benefited, but it swung back. Three, four months after that into a pretty good market.

Kison: We got this saying, buyer led M&A. You don't do M&A on impulse. Yeah. How'd you sort of build that view between your short term investment versus long-term view?

Larry Hartman: I'd say a lot of it comes down the pipeline.

Larry Hartman: I can't tell you how many deals we've done a year or two before we made an offer. They weren't educated on value, they weren't ready. They thought it was too low, so we let 'em go out and do their thing, explore. They came back a year [00:18:30] later and they saw we were reasonable. We were good guys, and we ended up getting the deal done.

Larry Hartman: So it's patience. Staying committed to how you wanna structure deals and do deals. We lose a lot of deals at the offer stage, and we're good with that. It's part of the process. So I always tell when. My business leaders come in from my sectors. They're like, they fall in love with the deal. I say, don't fall in love with any deal.

Larry Hartman: You don't know which one's gonna happen. You don't know what the founder's going to be reasonable. You don't know what complicated lawyer's deals are. It's just taken the long term approach. If I'm making an offer for a deal today and they don't like it, I may get 'em in 12 or 24 [00:19:00] months, and that's happened multiple times.

Larry Hartman: The timing changes and they are at a spot where they realize we're a real good option.

Kison: You gotta have patience.

Larry Hartman: Yeah.

Kison: What's your approach to building relationships with these founders? You get proprietary deals, you're doing this over time. Yeah. You're billing a relationship and then you're hinting or coordinating and, uh, definitely one of your perspectives on it.

Kison: And then you get the others that are going through a process. They retain an advisor. And they're setting stage gates and trying to get something done in like a month. Walk me through your sort of [00:19:30] philosophy and how you leverage, because the better relationship you have, the better the deal's gonna go.

Kison: In my opinion,

Larry Hartman: we've had less success on deals in the process. We don't get excited about a banker sending us something. We get excited about finding our own transaction flow and creating opportunities. Because you can build a relationship. They do value the time you spend to get to know them, to get to a point where something makes sense either way.

Larry Hartman: And we've done a couple where it's been a process, but we'll insist on time with management [00:20:00] time with CEOs so that there's a relational aspect due to the decision. I tell the story to, you know, potential acquisitions that when our last private equity firm invested. The multiple they invested at was not the highest of any of the firms we had, but they were a friendly firm who'd been around 30 years, who I knew their strategy aligned, who wasn't gonna make my life miserable.

Larry Hartman: And I'll reiterate, you don't want to sell for the last half a turn of a multiple because you're gonna have to live with this. You wanna sell in a spot where you're gonna enjoy yourself, where the strategy aligns, and you'll end up making a lot more money [00:20:30] in the long run because of it. It's having those kinds of conversations where.

Larry Hartman: A person who's selling you their business thinks it's their one time and they've gotta get the last dollar. And I just say, I've been through it. That's not what it's about. Whether you get 94% of something somewhere else, but it's a better environment. You enjoy yourself, you'll be way ahead. So find the right cultural fit, find the relationship, you know, so it's educating and talking that way.

Larry Hartman: And if someone doesn't value those things, if it's a pure financial play, there's probably someone who's gonna outbid you and outbid me.

Kison: That's where I struggle with it. I got a [00:21:00] couple, I got one deal. It's direct proprietary, no banker. The other one's got an advisor on it. Yeah. And you can tell they're kind of sitting in the middle.

Kison: Pull the founder off the email chain and you know, want you to communicate everything through them with the other person. You're grabbing the cell phone, you're talking through something or something they didn't like on NDA you. You pick it up and just start, yeah, handle it instantly. In some ways I feel like it slows down that relationship development, but that gets down to your M&A

Larry Hartman: machine, like how are you creating opportunity?

Larry Hartman: We have a pretty process in [00:21:30] ways we get, I've 10 12 deals and from. We have an internal team that does recruiting, that finds deals. We have a one buy-side banker that's bringing us deals. I speak at industry conferences and talk about M&A and people know we're in the business and reach out directly.

Larry Hartman: I look at the deals that are on my backlog right now. Probably one out of eight is from a banker to us versus us. Initiating and finding the opportunity. So it's possible. It's

Kison: being

Larry Hartman: [00:22:00] proactive, long term, dedicating time to it. It's spending time meeting companies ahead of when they're thinking about wanting to sell them, knowing you, your story.

Larry Hartman: I guess that's the advantage or disadvantage I've been doing this for 20 plus years, as I've been always thinking about the meetings I have today may not pay a dividend today, but they could in 2, 3, 4 years. So I've gotta build a long-term pipeline.

Kison: That's true. You. Convince people to sell?

Larry Hartman: Do I convince 'em to sell?

Kison: Yeah.

Larry Hartman: There's gotta be a driving reason [00:22:30] within them that they want to consider it. I'll ask people sometimes, Hey, what's your plans with the business? What are you gonna do? Are you gonna. Hand it off to your kids? Are you gonna retire? Or what are you doing? And sometimes they haven't thought about it. I think engaging a founder, what are you thinking?

Larry Hartman: If they haven't thought about it, I, I'm getting 'em to think about it. Right. And then I'll go down the road of, listen, my advice to you is if you're gonna sell it, you should sell it five years before you want to be done. And that's usually that day. Usually I'm talking to somebody, but they're not. 20 years away from wanting to retire.

Larry Hartman: [00:23:00] They're not loving what they do every day. They've been doing it for a while. They have something happening that they know, that they've gotta think about a transition. We get a lot where they think about selling it to the existing team that's there where I wanna maybe turn it over to my employees and we'll educate 'em on the math and challenges of how that generally doesn't work and how it's not better for them and how we've got lots of stories of employee purchase businesses that end up just handing it back to the old founder 'cause they don't wanna pay the notes.

Larry Hartman: That's the discussions two, three years before they want to sell. And then when they [00:23:30] do, they remember the fact that you were thoughtful helping 'em. Think about it,

Kison: if you have key people, you can still incentivize 'em, you can still provide some equity Yeah. Of options and things. Absolutely. Is that part of it when you're talking to these founders, you're inquiring about what their exit or sort, what the plans are for the business and then saying, Hey, up, thinking about exit five years ahead, m.

Kison: The role of equity seems like a big upside. Are you bringing that stuff up in those conversations as well, or do you wait till [00:24:00] later when they've expressed interest to sell the business? Once we present a structure,

Larry Hartman: we'll show 'em the math and we'll lay it out very clearly over five years, how it all works, what the upside could be, what their earnings will be during that period.

Larry Hartman: But there is also, how do you incent the non founders because there is often, I mean, we're looking at a deal right now where the two founders. Probably could retire. They've handed off most of the business to four other folks in the business. We have to lock in the four people who aren't equity holders.

Larry Hartman: So I was just going through the structure. What we're gonna do on that, and that one [00:24:30] is we've gotta have part of the earnout shared with the non-owner group. We've gotta make sure those four other people are locked into four year contracts. We gotta make sure they buy in or we're not doing the deal. We had another one we just closed.

Larry Hartman: It was a spinoff from another private equity firm. They had bought a legal recruiting business and it was part of a bigger legal services firm, and they weren't paying attention to the recruiting side, and they wanted to sell it. Well, the, the team that worked there for 10 years had no equity. So now I'm just, if I buy it, I'm paying the parent company for the business.

Larry Hartman: That's a risk. 'cause now you've [00:25:00] got a business you've bought with employees that aren't incentive at all. So. We approached that one where almost 40% of the proceeds would go to the management team that was there. We told the parent, you know, listen, we, we'll buy your business, but I can't buy your business and those people will leave.

Larry Hartman: So you wanna sell it. We're gonna have a significant amount of proceeds that are gonna get paid to the team that stays first. It's, but we've created the businesses. Yeah. But to sell it, you can't sell it without those people going along. But it ended up being a successful deal that we did. The management team was thrilled 'cause they went from no incentive into a pretty [00:25:30] significant incentive.

Larry Hartman: In that case, there's that thinking about who are your key people and how do you lock 'em down? It's not always

Kison: the selling shareholder. I throw another question at you on this. Got a proprietary deal, got a controller building relationship. I've had another deal where I reached out, but then all of a sudden it's like an advisor.

Kison: They've already got this advisor. Yeah. Retain. And they're the ones that come back and reach out. And what I'm realizing is that there's a number of meetings that you have that gives you more certainty. Yeah. And then this is where I wanna tie in the culture piece to it, because the better I understand the [00:26:00] culture, the better.

Kison: I understand certainty that let close this is gonna work out. And I'm just curious on just your advice. A certain number of meetings or just certain things that you really want to get to, to get that level of certainty. And then what do I do in the advisor situation? Do I demand to have that kind of, that same level of engagement?

Larry Hartman: The advisor side, you need to be friendly and engaging with the advisor, or they can steer a deal away. So if they see, hey, you're difficult, you're not a high probability of closing, they're gonna push [00:26:30] that. Seller to someone who has high probability of closing. So I'll start with the advisor. There's a separate sale to make to the advisor that you have capital.

Larry Hartman: You're serious. I always tell the advisors we've had a hundred percent of letter of intents have ended up in closed deals. I. And we've never repriced a deal. That's what they want to hear. They don't want to hear, well, you're throwing out terms and you don't close things. Or by the time you get to the end, it's gonna be different.

Larry Hartman: And these are true facts in the deals we've done. So I have this process to make sure the advisor knows we're [00:27:00] real, we have capital, and we're good guys to work with. Now you shift the other side. You gotta spend time with the company. When we do that in a couple different ways, it'll be the social setting.

Larry Hartman: Let me get to know you, tell me about the business. Then we dig in and do the diligence. But often, and we're doing this right now before we make an offer, we'll have a session where we wanna sit down and talk about the next five year plan. And we're doing this, I'm in two hills right now, where before we've got the numbers, we know what we wanna offer, but we gotta get that owner engaged in helping us think about what are the growth drivers on their side.

Larry Hartman: And as part [00:27:30] of the fun discussion they get excited about, they get lit up about, oh my goodness, I've always wanted to expand into this. I always wanted to have an investment into that. I've never been able to do that. So I find that session to sit down and say, Hey, before we can finalize an offer, let's spend some real time thinking about the synergies, what we could do, and let's create a framework for a plan.

Larry Hartman: Now that does two things. It creates the working rapport that you need. It kinda creates the framework of a deal, but it also creates what you're gonna tie back to some incentives. That they've been a part of. So if you throw some numbers [00:28:00] at 'em and say, Hey, if you do X, I'm gonna pay you Y. It's less impactful than, Hey, we came up with this five year plan and it's pretty ambitious.

Larry Hartman: But if you hit. 80% of that five year plan, you're going to get a great extra super earnout. And we've done that where we'll have a standard structure and if they hit a real big number, we'll say, no, there's a super earnout. Well, it's a super earnout. Well, okay, hit that really big growth number. We'll pay you even more.

Larry Hartman: It's the process of engagement that through that is how you build trust and you build a business chemistry with a firm and even with an advisor. [00:28:30] They may sit in on that session, but they're not gonna be adding much value to you having a strategic business discussion about growth.

Kison: Yeah. So you're really thinking through a five year plan.

Kison: What do they see? What are some of these things that they may, you may be able to enable them to do? Yeah. Other firms cut that short. They don't spend time on that. So again, you think about that. She got your diligence checklist,

Larry Hartman: Larry. That's why you wanna sit there and check boxes off of that doesn't make someone wanna work with you, but a vision of a dream of building something with a business.

Larry Hartman: The sports business I told you about. When I [00:29:00] sat with Lynn, and I remember it was during Pandemic, and we met at my house because you couldn't meet in person anywhere, but we met on my deck. Yeah. We said, what is it you wanna do Lynn? He says, I want to have the biggest sports recruiting business in the world.

Larry Hartman: I said, what does that look like? Korn Ferry today has the biggest one. It's 9 million a year that they do in this sector. I said, okay, what do we need to do that? We need to build college sports. We need to build Europe. I said, okay, let's build a plan out. And we built out the vision. He got excited about the vision.

Larry Hartman: I said, I'll fund that vision. We're gonna do that. Take us time. We've executed a hundred [00:29:30] percent on that. Talk to Lynn today. It's like everything you said, I said, it's what you said. I just pulled out what you wanted to do and we built that plan and it's been successful. So he bought the dream and the dream ended up being something I could back and grow.

Kison: There's two different hats. There's minimal risk. Yeah. That's one hat. And then there's maximum value. That's another hat.

Larry Hartman: And they're selling rapport and they're getting them to wanna work with you. I still maximize value. Yeah. It's like part of it, right? It's like, I guess it's because it

Kison: is like, Hey, I'm sharing the same vision, like you're sharing your vision with me.

Kison: Yeah. [00:30:00] Now it's becoming our vision. Yeah. I think you're right that it does get cut short because when you think about due diligence. It's not maximized value. I, I guess one is like, how do you strike that right balance? Because I'm doing it right now. I'm looking at a deal. I'm literally only

Larry Hartman: thinking about minimizing risk.

Larry Hartman: For us, we're fortunate. Diligence is done by a Q of E with an outside firm in a law firm. That's just diligence. Check the box. What are the financials? What does it say? Legal? That's a check the box, but. The rapport building and the building the plan together, that's high value work [00:30:30] to get to a deal that would want to work with you at a price that may be less than someone else, but also sets the table for hitting the ground running to have a successful deal.

Larry Hartman: And it gets into what is it we're gonna do after we're together? I mean that part about you buying something and in six months you don't agree on direction. That's the wrong time to have that discussion. It's not gonna work. So to me, that part about saying, Hey, let's agree on what it is we're gonna do, how we want to do it, and some stuff's certainly contingent on hitting thresholds and margins and all that kind of stuff, but it [00:31:00] creates a better working relationship

Kison: too.

Kison: It's a strong point here, is to really put as much emphasis on maximizing value referencing bar lead M&A. Yeah. As the framework, a key component of it's just early integration planning at the end of the day that you should be doing it in parallel, which it seems like it's what you described, it's almost getting that alignment.

Kison: Can you tell me a little bit more? Is there anything that you do specifically to connect diligence or even diligence findings with like your integration or just integration planning in general? We have a plan for every

Larry Hartman: acquisition. Each one's a little bit different in terms [00:31:30] of what we want to do based upon how fast we want to grow and expand.

Larry Hartman: But in our world, and again, these are people, businesses, we have a mantra that we tell the companies that first thing is do no harm. We're buying you for what you are. And we're gonna bring the good things about being part of our platform. So we bring good things, we give 'em a global footprint. When they might be regional, we give 'em technology they didn't have, we take off the things they don't generally like, right?

Larry Hartman: We're gonna take off her, it and accounting. We can do that for you. But then over time we start to integrate in a deeper way. [00:32:00] So. Our thing on integration is layout with them. What's it gonna feel like? But don't disrupt them too early. In the first three to six months you can get overwhelmed with change and let 'em continue doing what they're supposed to do.

Larry Hartman: So we've taken our time on it and sometimes it's a year's process to really get 'em into the fold where they're on the same CRM systems. We connect all that up. But we'd rather get the financial performance than perfect integration. We can figure it out. The accounting integration being perfect later, or the IT integration [00:32:30] test, its numbers first and culture and clients don't screw up what they have with their clients with the culture, and you take your time on the other thing.

Larry Hartman: It's catastrophic if you screw up a deal.

Kison: Yeah. Don't piss people off. Yeah. How and when do you communicate this? Hey, there are gonna be some big changes that we do after close because I feel like this is where things go rise. People get blindsided by it, then people get pissed off. That may be in the third or fourth meeting we're talking about the business plan.

Larry Hartman: Yeah. Before, yeah. Or maybe part of it. But in our world, they know that it does no [00:33:00] harm. Bring the good things and then integrate. That's the playbook of how we describe it, and that's how we live with that. Now, it may be a 12 month process, sometimes it's been a two year process, so I think it's understanding the business.

Larry Hartman: Some have deep brands, deep customers with. For us contracts that are complicated. We bought a business in the higher ed space, had been around 40 years and they had contracts with universities that are tough to get MSAs to switch over to another firm. So we didn't want to disrupt contracts, we wanted to keep things rolling.

Larry Hartman: That one may take three years to [00:33:30] fully integrate the contract side, the billing side. We can make that work. Internally, it's more work for us, but

Kison: externally, the clients don't feel any different. Does it end up like different, I'm assuming most of your deals are like asset deals. Does that end up being like a stock deal than later on?

Kison: We've had a few stock deals and we always try to do asset deals, but there are more stock deals than we probably care to admit. Well, like that example, when there's like this sort of long MSA in there, does that end up being more of a stock deal? Yeah, and you gotta,

Larry Hartman: there is value in the value of the contracts and what they have in, in that side of the business.

Larry Hartman: Luckily we've had flexibility to do both, you know? [00:34:00] Yeah. Both stock or asset deals. Let the lawyer

Kison: get into.

Larry Hartman: Yeah. Leads

Kison: in the next interview. This is good. In terms of looking, again, the integration, a lot of it's communicating early, setting those expectations. It's big bid ass spread. It's, it's one I'm curious about and I'm noticing it.

Kison: I'm sure you run across it. I know we're different industries. I. Especially in software, people see what the VCs are investing in 10, 20 x revenue. Yeah. And then their expectations are so high. How do you manage that? Because a lot of [00:34:30] the companies I'm looking at, it's like you're not in triple digit growth.

Kison: You're pretty stagnant growth. And they have a misaligned view of their value because of what they hear. Yeah, exactly. I'm just curious, like if you encountered that, how do you sort of get that rationalized? We're in a world.

Larry Hartman: The multiples are not that I wish they were. We're trading at companies in the five to seven times EBIT number.

Larry Hartman: Nothing to do with revenue. It's ebit, so it's low, multiple. We create value through lots of earnings. But that being said, especially when we're doing proprietary [00:35:00] deals, the people have a misinformed view of what their value is. What we'll do, sometimes we pull out public company comps. In our world, good or bad, our public company comps are Korn Ferry hydrogen struggles who don't trade at great multiples in in general.

Larry Hartman: So we'll educate 'em and look at the public company comps in our market of what things are trading at, give 'em an indication where we are and explain to them we have to have some arbitrage between what we trade at and what you trade at, and this is what the market is. If we're trading at a six or seven, we [00:35:30] will buy something at a four or five.

Larry Hartman: And there are deals that when we tell 'em that they go away and a year later they come back sobered up and realizing nobody's paying two times revenues for their business. That is worth 40% of that. The first time when buyers see a price and it's proprietary deal stuff, 50% of the deals blow up at that point.

Larry Hartman: 'cause they're just unrealistic. You're at a point you don't have deals. It's like you're pretty programmatic about how

Kison: you,

Larry Hartman: oh, sometimes we get the price quick just to screen it.

Kison: Yeah.

Larry Hartman: We need to give you an idea what this would look [00:36:00] like. We'll refine it through diligence, but here's how we're thinking about it.

Larry Hartman: 'cause they'll say, sometimes we'll get clues that they're unrealistic. They'll say things about value and we need to make sure they understand the market or go get educated about the market and we're competitive in our space on buying businesses. We're not gonna be the highest, but we're the most active in our space of anyone.

Larry Hartman: We've got some credibility to tell 'em, Hey, no one's buying more than we are, and this is what the market is. But

Kison: there's comps. There's the second bite of the apple. Yeah. It could be like, Hey, you know what? We're gonna share this upside. Yeah. Because [00:36:30] whatever we get valued at next, you're gonna get a good chunk of that in your value.

Kison: At the situation when you have proprietary ds, one thing dealing with a founder directly to, to try to get realistic expectations on value, and the advisor is another one. Maybe they're not running a full auction process, but they're running that kind of targeted type of, uh, approach. And some of it's almost like they're fielding out bids and you almost feel like you're bidding against yourself.

Kison: If you put something out there, you, you don't wanna just be thrown, you know, because they almost like [00:37:00] are creating a little bit of this distance where you're not having that table seat conversation. Maybe you should, maybe I should be at the table with the founder to prove, to start presenting the terms.

Kison: Yeah. My gut is

Larry Hartman: you're gonna have a hard time competing in auction. I mean, it's just tough. You're, if they're out really going to a hundred companies, they'll find somebody that wants to buy a software company at a price that's probably, you know, a stretch. So, and,

Kison: and they tell you, they don't, they tell you like, oh, we're just got a few companies looking at this.

Kison: And I'm just like,

Larry Hartman: uh, I think it's finding a sweet spot where, you know, you can do [00:37:30] something other people can't. We've bought a lot of businesses, call it 10 to $30 million in revenue as add-ons to our platform. That's too small for our public companies comps for Korn Ferry. And he too wants to buy 'em, that's not worth their time and it's too big for the boutiques who don't have capital to buy 'em.

Larry Hartman: So we've figured out a little bit of a sweet spot of like, Hey, if it's a deal this size, we can be competitive. If I get a banker calling me on a 50, a hundred million dollars deal. They're shopping it. I know I'm not gonna waste my time. They're gonna go out everywhere. It's gonna be [00:38:00] price sensitive.

Larry Hartman: It's not about re like there's a point where it's not about relationship, where it's gonna be about price. If I'm in your shoes, it's okay. Where could you find deals that are not gonna be, I. It's obvious to everyone else, but they're great for you that you could find a little bit of a competitive advantage to, to win those deals or create those deals.

Larry Hartman: So I wouldn't wanna be competing against other software companies that are 10 times your size with a better multiple.

Kison: I agree. That's where I'm looking at these smaller, like three to 5 million revenue companies. Yeah. Not those are, [00:38:30] that's are good

Larry Hartman: sides.

Kison: Yeah. There's not a lot of others that look at it especially.

Kison: Yeah. It's too small for them to hurt their head and especially if they're stagnant. If they're not, if they're stagnant, then you know you got a founder that wants to leave. Yeah. So all those sort of things becomes less attractive. Yeah.

Larry Hartman: You'll find your sweet spot. That to me is what you do is you come up with the box of what is it that you can do that's attractive, that falls in a range that's not gonna be 10 firms bidding on it, that you waste your time 'cause you can waste a lot of your time on the wrong deals.

Larry Hartman: I'm big about not wasting my time on a deal that has no [00:39:00] probability of closing, and I can sense that, I guess just with age you get a sense of that. But from an initial conversation or two, I get a feel whether, okay, this is a deal I should spend time on

Kison: now. You ever bought a deal outta the chaos? In terms of turmoil and AC company turmoil stuff going on, maybe you just, some real issues are going on and you gotta roll your sleeves up and do some fixing up.

Kison: No, I mean, it's

Larry Hartman: funny because our private equity group likes the idea of broken toys, buying things that used to be profitable that aren't now, and I'm like, I don't want to fix it. There is a philosophy of [00:39:30] doing that. It is tricky. No, we've tended to find, again, our sweet spot is. It's profitable. It's got a certain revenue size, they want to stay.

Larry Hartman: As we talk about it, I mean, I'm probably pretty clear about what really fits. And then the other stuff on the fringe, it's like, no, we're not doing that. We passed on a lot of deals that had lots of revenue, no income. And it's like, yeah, but if we did this or did that, or you owned us, we'd make money. It's not.

Kison: We're not gonna

Larry Hartman: gamble

Kison: on that. I think. I don't know if it's me just having Indian blood, like I'm opportunistic, I'm always looking for a deal. There is [00:40:00] a

Larry Hartman: way to do those deals. We've done one that way where we bought the business on future EBIT A only. So we'll buy you and you show me you're gonna be profitable.

Larry Hartman: So I'm gonna buy you off what your profits are in the second year. I'll give you the formula because they'll say, I'll wait, I will be profitable. It's like, no, I'll buy you now. You tell me you're gonna make $2 million in two years. I'll pay you four times that number in two years. It's zero now, and I'll help you get there.

Larry Hartman: So it's better risk than you doing it on your own. So I'll pay you nothing now, but I'll pay you uh, in two years on the earnings you generate and I'll take some risk off. You [00:40:30] don't have to worry about it. And then accounting, how do you

Kison: keep from weird things happening? Are they like, fire everybody in the second year just to, you gotta feel good

Larry Hartman: about the people and the reason.

Larry Hartman: Yeah, and that's something, the broken toy thing is tricky and there are certainly firms that make a living finding. Challenging things, stripping costs out, figuring out how to make 'em profitable.

Kison: We've just gone in a different direction. How do you think through strategy? I think one of the things is I'm, I'm looking at these opportunities.

Kison: They're very obvious. They're stuff directly in our space. Yeah. Which overlaps in capability and I'm just [00:41:00] wondering if we should be more strategic, looking at the broader universe and adjacencies that would be more cross opportunities as. Very similar types of assets.

Larry Hartman: I'll give you the parallel to what we did.

Larry Hartman: Started off exec search firm first private equity investment. We went from 10 to 40 million as an exec search firm. Then it was our clients have more needs than pure exec search. They have interim needs, they have consulting needs. They have RPO Scale up needs. Let's take advantage of the fact that we're having conversations with CEOs boards and [00:41:30] we can address those needs.

Larry Hartman: Thus. Four years we've been diversifying. That's been part of the strategy, but there's that we have some scale to fuel cross sell. We had scale. We had a hundred managing directors on the search side who were finding opportunities. When we started getting in the interim space, half their business came from the search side of our business.

Larry Hartman: So definitely there's adjacencies that can make sense in the early days. If it's a small piece and you're a smaller piece, is it really gonna fuel? Is any part gonna [00:42:00] fuel the other, right? Are you better off pouring into your core business? And then when it's larger, look at the diversification a little bit more.

Kison: Obviously the strategy will evolve as you grow, but in this early stage, and maybe it's just valuation arbitrage is basically what I'm hitting on, is at least get big enough where over 20 million revenue opens up up to a different pool of investors and different valuation multipliers.

Larry Hartman: Yeah. You're in a good spot.

Larry Hartman: You're valued on revenues at high numbers, so it is worth some gambling for sure. If you can find. How to aggregate to get to the size and [00:42:30] scale where you're gonna get the better multiple. So again, you gotta be careful that you don't buy it and then it disintegrates in three years and you're at 50% of the revenue level you bought it at.

Kison: So no, that's why you want the steady revenue stream. Yeah. Finding the right private equity partner. Yeah. Dating. Teach me now I'm starting to take it serious. Yeah. In the beginning I had a little ego and it's, nah, you're gonna doing well. Like I didn't, when I wanted the money, you didn't wanna give it to me.

Kison: I don't need the money. You wanna give it to me? But now it's like, oh, there's some good private equity firms out there. There's great ones. Not all [00:43:00] bad ones. There's some bad ones, but they're not all bad. There's some actually really good ones where I'm impressed. I've had 'em on the podcast. You're just highly sophisticated investors that I could see.

Kison: I would love to work with some of these people. They would teach me some things. They would challenge me. They would help me grow professionally. How do I go about finding them and making sure that those first few dates you don't jump into the marriage too fast and find out you gotta get a divorce? My first

Larry Hartman: private equity raise, I did the fundraise myself.

Larry Hartman: I'd say it's probably a mistake. We had 10 million in revenues. We went to the Mez Finance world and [00:43:30] reached out to a bunch of people and had a bunch of meetings. It would've been better if I had someone representing us. The second process, we had a banker that went broader, but at the end of that process it was finding someone that aligned on the strategy.

Larry Hartman: There was that time to say, let's, you know. Same thing you talk about doing with someone you're buying. Does that PE firm strategy and belief in what you're doing, are you aligning on that? Are they the kind of firm. That puts an operating partner next to you? Are they the kind of firm that's hands off? Are they a patient investor?

Larry Hartman: We were fortunate that we did a lot of [00:44:00] recruiting for private equity firms already for portfolio companies. So my team could tell me who fired their CEOs that I didn't wanna bring on that would get rid of me. Let's bring a new CEO in who sticks with management? Who's patient, who decides they want to change things out?

Larry Hartman: There are thematic approaches PE firms have of how they deal with founders management, patience downturn, and it comes out through. The history of looking at other portfolio companies. So my advice to you would be, if you're gonna go raise capital, it's a lot of time. We'll go through a [00:44:30] process, get term sheets, and get to know a few and pick the best one.

Larry Hartman: This is a good time. If you have a good business. He's always looking for great investments. And then the diligence is probably around past portfolio companies, CEOs that have exited and are in place and talk to 'em.

Kison: Reputation. I agree. Yeah. I'm starting to feel that out where I talk to good folks I know, and I ask 'em.

Kison: Yeah. I sense that, which I think is important. It's like you get a good referral to a lawyer or any other provider. It's meaningful. Running the process is interesting. I guess one thing I was thinking [00:45:00] about was it seems like when you're over 20 million revenue, it opens up your horizons to more of these sophisticated things.

Kison: A little more sophisticated. Yeah. I feel like when you're small, you have everybody reaching out. Yeah. It'll search for funds and just random people. Yeah. And some don't have money and they want to take your deal. Go. No.

Larry Hartman: That to me is always, yeah. You can waste your time on something. Oh yeah.

Kison: I'm wondering if, Hey, can I lock in an opportunity?

Kison: A couple, one or two of these targets, and then use like a post acquisition performa to maybe I'm a little [00:45:30] ahead of myself here. Use that to say, Hey, here, we're gonna put this company, maybe this another company together. Get us about a 20 million revenue, and then share. Well, that's

Larry Hartman: it. Yeah, no, that's absolutely a strategy.

Larry Hartman: If you found a bigger deal that was more expensive than you wanted to do, let's say it's equal size to. I'm in the process of raising capital. Here's what we can do. I'll pay you X multiple around closing a deal and you, and I'll be part of closing the deal together. You come to that private equity firm and say, I've got growth plans, but I've got a deal right now that'll close as part of the [00:46:00] deal.

Larry Hartman: They love that. Then you could get that value in a sort of position. You're, you're gonna get some arbitrage on it. You're gonna get the scale of a bigger company. And when we go to our processes, and we'll be in the market again in 9, 12, 18 months with some period to, for our next private equity investor.

Larry Hartman: I want to have $50 million deal sitting there for that next investor, but bigger than what we would've done. It's probably not a deal I would do today, but it's a deal I would do with that next investor who's got a bigger appetite and it'll be sitting there ready to close and I can go to that company I wanna buy and say, Hey, I could [00:46:30] pay you a little premium on the multiple.

Larry Hartman: You're gonna be part of my process. And. I've already started those conversations with people that I know actually are a little bit bigger than I wanna buy today and just say, Hey, if you wanna do something end of the year, I'm gonna be in the process. It might align really well with your size and what you think your value is, so you know, it's absolutely, I.

Larry Hartman: Put a deal together with a deal is a great strategy. PE loves it.

Kison: Okay. That's actually good to hear. So that way I get the upside of the target valuation of where I wanted to be at. Around the 20 million mark.

Larry Hartman: [00:47:00] No risk unless the deal closes. Like it's

Kison: kind of an if then deal, you know? And yeah, there's still gonna be dry powder.

Kison: Yeah. Based on the terms of we'll go continue doing more deals. Yeah. It should be a good win-win. What do I need to do to pitch that? Do I need to just come up with a performance? What should I be doing? Pitch that kind of, um,

Larry Hartman: certainly you need your five year plan and what it looks like, and then you gotta be able to go and five years out.

Kison: Okay.

Larry Hartman: I would think so. I'm always thinking of a vision, and again, the first two, three years are pretty much a plan, but then there's a vision of what you wanna build. 'cause you've gotta sell that vision to the guy you wanna buy. [00:47:30] And then finding that deal to say, Hey, I'm gonna be in the market. Are you interested in being part of a private equity transaction?

Larry Hartman: We could do this together and here's how I would think about value and it'd be part of us getting this done on a deal. And you can go pitch that. I would save that for a deal you think is too big for you to do a loan today. Or that maybe is a stretch on price that you say, I wouldn't take that risk on a deal where I've got more scale, I would do it.

Kison: Let's talk about wealth preservation. So, because that's a big question. Yeah. I got, I'm in [00:48:00] a fortunate spot where I bootstrap everything to this point. Yeah. I got an option pool to take care of the team members in the company. And we're growing. We're 40 plus percent year over year growth. Yeah. And I have confidence we'll maintain that for next few years.

Kison: So part of me, when I look at this, the capital, it's like I don't really wanna dilute the equity right now for the organic stuff. 'cause we don't really need it. Yeah. We got good cash reserves and we're growing nicely, but the acquisition makes it interesting. But then you're like, leverage as much private credit as possible.

Kison: Or even better have the seller who earn now hold some paper. Yeah. Get [00:48:30] them to take some of the risk. Maybe you get the right private equity partner that's gonna bring this level of sophistication where I don't have to overthink this capital structure like you described.

Larry Hartman: I mean that,

Kison: that to me sounds like your dream.

Larry Hartman: Again, most private equity company will look and say, Hey, if we're buying you, can we put four turns of debt on you and they're gonna go get a debt commitment ahead of time. I. We did that. It was initially with a bank, but the banks just grew conservative and they reached out and made it a private credit transaction.

Larry Hartman: So part of that right private equity firm is they're gonna put debt on you anyway. And how much of that's gonna be [00:49:00] dry powder you can draw down on, and hopefully you have both equity and debt to be able to grow with. Which we're fortunate to have both.

Kison: It makes sense to have both. 'cause they're gonna get better terms on the debt's, what I'm realizing.

Kison: Yeah. The bootstrap company. The banks are not friendly towards you. No. When

Larry Hartman: you're

Kison: private equity backed, there

Larry Hartman: are lenders that will lend to you. If you're not and you're private, they won't try. So what kind of terms are you getting? I. I'd say private credit's more expensive than a traditional bank, but in a private equity setting, interest is an add back and we're a positive cash flow business that's profitable.

Larry Hartman: So [00:49:30] it's, I I would say this, and it doesn't really matter what the interest is you're paying 'cause it's not how they measure EBIT for valuation. Whether I pay, I see 6% or 8%. I don't have a cashflow problem and it ends up being the same net income either way. 'cause it's an A,

Kison: I'll tell you bootstrap, it's 16% interest only.

Kison: And then to buy down to 12, 13, you're giving up lot of warrant. Yeah. To,

Larry Hartman: yeah, that was our first round. We did a Mez deal with Mez debt at, you know, in the 12 plus range, plus equity and preferred returns. But it gets better as you go along. We get the right investors. [00:50:00] Yeah, I mean, yeah. I mean we were with banks at 150 over L-I-B-O-R and all that, but.

Larry Hartman: If you want to keep acquiring things, the math is great. You can pay more in interest to go do accretive deals that create value

Kison: your first semester. Was it a minority or

Larry Hartman: majority

Kison: recap? Minority. Minority, yeah. First deal was a minority deal. That's what I was thinking. Do minority. Yeah. Get comfortable with it.

Kison: What does it end up being? Like? 30% That you? 30%.

Larry Hartman: Okay. I ended up buying out a partner. I had a 50-50 partner who didn't wanna. Going down the road of bringing on capital and I was getting bored and it was kinda like, I don't want to just keep this [00:50:30] business as a lifestyle business. I want to go raise capital.

Larry Hartman: And he didn't want to. The first investor said, we'll buy him out. And I said, that's great.

Kison: When you bring this capital, it's sort of, here's a percentage allocated as primary capital to grow the business. And then here's secondary, which some of that secondaries to buy out the partner. Yeah. And then if you wanted to take some off, you could take some off.

Kison: Yeah,

Larry Hartman: I, yeah. And I didn't take any off on the first deal. Second deal certainly did.

Kison: Okay.

Larry Hartman: Yeah. So then I started to dilute myself. So yeah, went from a. Two thirds owner up to the first deal to, I'm probably down to 8%. I'm down to now, but it's also that percent is of a lot bigger [00:51:00] number. So to me, dilution is not dilution.

Larry Hartman: If you're creating more of dollar value, which

Kison: yeah, have confidence, what you're gonna

Larry Hartman: execute. I know it's important to hold on to equity, but at the same time, when we took our company public, the first company, the three partners or two other partners, and myself, we own 51% of the company. We never diluted to buy anything.

Larry Hartman: Like I look back like I should have bought, I mean we had public company currency. We were a publicly traded company. I could have bought a bunch of companies with stock. We could have gone a lot faster. We didn't do that. My first business. I was maybe [00:51:30] didn't understand how to drive that. You brought up having private equity as a partner can be helpful.

Larry Hartman: They are helpful. I tell people if I wanted to screw up this business, I couldn't because they wouldn't let me. I have a good board. They're smart, they keep an eye on things and certainly we're all aligned. So having a private equity partner. To help you keep an eye on things is a blessing for an entrepreneur.

Larry Hartman: You know, at the end of the day, you're creating value and you're gonna create a business that sells for a significant generational wealth changing kind of an event. So why not have oversight? These are smart folks who know how [00:52:00] to create value. That's how I always looked at it as I'm gonna keep alluding myself, but as long as I'm creating enterprise value, that's meaningful to me.

Larry Hartman: It's, yeah, that's what it's, I have a

Kison: turn a cheek on pe. Like I said, there, there is good investors out there.

Larry Hartman: Yeah, there are no, I've had great experiences and it's finding the right ones who you align with, that you build a good relationship with. And it's no different than, like you talked about buying a company.

Larry Hartman: You need a relationship. You need to invest time where it's not just quarterly reviews. The numbers where they, they know you. Larry, what's the craziest thing you've seen in M&A? [00:52:30] There's certainly deals that we've been involved in. You find out things afterwards with behaviors, relationships, things you didn't know.

Larry Hartman: There's always things there that sometimes you have to clean up and do, and not that crazy. But I think we've had a deal. We've had some deals that, one, we bought a business in the interim space that was a really good business. It was a larger one, and we made an offer. The owners literally thought they were worth like a tech company, like one of your companies.

Larry Hartman: And it was, the valuation was like off by 70%. It was a great business. [00:53:00] And these were founders that were, they were like 80 years old, but they had an annuity business in the higher ed space and they just had a completely unrealistic view of what the value of their business was. And it was just like, wow.

Larry Hartman: We went down all this road and they came back, uh, with just like crazy demands. We ended up 15 months later closing the deal at a reasonable number. Sometimes the reactions you get on valuation can be a little bit crazy. In general, the founders have been, and they haven't done things that are noteworthy in terms of stories of craziness, but [00:53:30] how

Kison: do you

Larry Hartman: present your offers?

Kison: Are you doing it in person like, Hey, this is where we're at. Oh, no. Or you send it. We remember back in the day, you send a fax and then you wait for a response.

Larry Hartman: Because we do a lot of these and I know that only one out of three offers is gonna move ahead anyway because of unrealistic expectations. A lot of times we do it usually in a Zoom meeting with a PowerPoint with a full.

Larry Hartman: Built out 1214 page presentation. We don't send it ahead of time. We walk through why we love your business, what the deal hypothesis is, what we [00:54:00] see the business being in our, under our framework. Here's how we structure the deal. We show 'em all the scenarios of what the total value would be with our stock if our stock goes up.

Larry Hartman: Because I think, again, total return is what we model out like if we get a 2, 3, 4, 5 x return on the stock piece, this is your net number. And now again, reiterate. Our growth strategy to 'em, why they, why that has a realistic chance of happening and, and walk 'em through a whole storyboard. So it's a pretty well thought out presentation and that [00:54:30] precedes any letter of intent.

Larry Hartman: It's selling them on the vision, getting their buy-in. Then there'll be some back and forth, and then it leads to a letter of intent from there. We're selling the good deals. I mean, it's, we want 'em. We're trying to grow. It's not picking, and we always say that about recruiting top talent. You're not just picking top talent.

Larry Hartman: You gotta recruit 'em to join your team. Good acquisitions, it's the same thing. You've gotta convince 'em to be part of what you're doing. Some people make the mistake and treat it like, like you said, if you're just doing diligence. Financial transaction. Yeah, it's a financial transaction. You'll [00:55:00] get a financial seller is all you're gonna get.

Larry Hartman: We're convincing people. That probably wouldn't want to or maybe aren't sure what they, what they wanna do to do it now with us. 'cause we're the best option. It's a journey. Yeah. But it's fun. I appreciate where you guys operate because 40% of my day is in M&A deal structure negotiation.

Larry Hartman: It's. Constant and every deal's different and every structure's different, and every owner, buyer, seller's different. So

Kison: it's a whole lot of fun. Larry, thank you so much for taking the time to have this conversation. [00:55:30] You've helped me become a better M&A scientist. I

Larry Hartman: appreciate the time. It's great to brainstorm and talk about things going on and getting deals done.

Larry Hartman: So good luck to you and your endeavors and appreciate the time and interest and what we've been doing.

Kison: Hello, many scientists, if you listen this far, you're right there with me. I'm hoping you find this content valuable. I love to hear from you. If you do find it valuable, reach out to me on LinkedIn, like getting feedback, connecting with folks that actually have the patience to listen to this long form content and ideas.

Kison: You got some other topic [00:56:00] ideas, things I'm, I'm missing out here and criticism. I welcome it. I'll take it. That's how I get better at doing this till next time. Here's to the deal.

Kison: Thank you for taking the time to explore the world of M&A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple [00:56:30] Podcast. We'd love to hear from you. If you need help standing up an M&A function or optimizing one that you already have. We're here to help, and if we can't help you, we probably know someone that can.

Kison: You can reach out to me by email Kison, K-I-S-O-N, at ma science.com, or you can text me directly at 3 1 2 8 5 7 3 7 1 1. If you just want to keep learning at your own pace, visit ma science.com for a [00:57:00] lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's ma science.com.

Kison: Here's to the deal.

Kison: Views and opinions expressed on M&A science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. [00:57:30] This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.

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