When Integration Beats Roll-Ups

Kison Patel: [00:00:00] I am Kisan Patel, and you are listening to m and 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 and a deals.

Kison Patel: Hello and welcome to the M and a Science podcast. This [00:00:30] podcast is part of a mission to rethink how m and a is done. The old school settle it approach, it's dead. Fire LED m and a is all about strategy, alignment, and efficiency. Putting value creation at the center of every deal. And let's be real. It's not just about closing the deal, it's about making it successful.

Kison Patel: We uncover what truly works at m and a by learning directly from the best. Today I'm joined by Tim Hall, managing partner and founder at Brenton Point Capital partner. Private equity firm. He launched in [00:01:00] 2024 after an incredibly successful 20 year run at CI Capital Partners. Tim brings nearly three decades of private equity experience, having started his career at GE Capital back in 1996.

Kison Patel: Now at Brenton Point, he's already putting that playbook to work with their first platform investment in Easton Select Group, a pool and spa services company that's actively consolidating the fragmented outdoor living market. Today we're gonna talk all things roll-ups, especially integration because every private equity firm loves to talk about integration.

Kison Patel: We're gonna talk about the independent [00:01:30] sponsor model. Tim, how you doing?

Tim Hall: I'm doing great. Thanks for having me. Appreciate it. Hey, thanks for

Kison Patel: joining me Live here in Manhattan, hanging out at VRCs office. Can we kick things off with a little bit about your background?

Tim Hall: So I have been now in the private equity business for 29 years.

Tim Hall: Seems hard to believe, but started in 1996 out of business school at GE Capital in their equity capital group, which was a very just place to sort of learn the trade. It had obviously a great trading ground, but one of the unique things about GE Capital's equity investment strategy is they tried to align their [00:02:00] investments with one of the 13 industry groups in which GE participated.

Tim Hall: So what you had, there was experts to call from those businesses to understand the dynamics of an industry specific potential targets, somebody that might be a customer or a supplier of one of the GE businesses. And that always stuck with me, where having that sort of expert network, that advisor with you, that knows the business from the inside out is something that I've always thought, how do I leverage that?

Tim Hall: How do I maintain that going forward? And that is something that we have as a universal model in all of our deals. We always view ourselves as a. [00:02:30] The dumb money, if you will. So how do you surround yourself with smart money and have that money align with you in the deal? So those people conduct due diligence with us.

Tim Hall: They invest with us. They sit on the boards with us, their advisors, not only to us, but if done well, advisors to the executive teams of the companies. And that's a model that I learned almost 30 years ago. And it's something that we find to be very valuable and something that again, not only helps us be successful, but helps us attract the companies to us.

Tim Hall: We're bringing more than just money.

Kison Patel: We accumulated all this deal experience, worked through the different angles in the [00:03:00] private equity ecosystem. Now you're building your own platform and you're giving me some of the uniqueness, but can you maybe explain the model itself? 'cause you essentially operate as an independent sponsor.

Tim Hall: We do. So an independent sponsor means we identify an opportunity, we identify the experts to bring to that, and we raise capital on a deal by deal basis, each in a specific vehicle. So one of the benefits I like of that is it allows us to be concentrated in a smaller number of deals rather than have to do eight or 10 or 12 deals across a fund.

Tim Hall: I can be [00:03:30] significantly invested both with my own capital, but with my time on three or four or five. It also gives us flexibility to own things longer and do things of various stages of development and sizes. So I'll give you an example. We, as of this morning, completed our third acquisition of a platform.

Tim Hall: The second one that we did was probably atypical, and we did that one in July for what a typical private equity firm will do. So we essentially scratch start of the company in the funeral services space. This is a space we find very interesting. It's very stable. [00:04:00] It's quite fragmented with over 28,000 independent funeral homes in the us, but very difficult to find a platform.

Tim Hall: Typically, when things get even to a couple million dollars of ebitda, they're either bought by another private equity firm who likes a stable cash flow, or one of the two large strategic consolidators. So I've looked at the space for a long time, struggled to find a platform of scale. In the independent sponsor environment, we were able to scratch start a company.

Tim Hall: So we hired A CEO who was well known to us. It's the brother of a prior portfolio company executive. He had just done a very [00:04:30] successful funeral consolidation platform and we committed personal capital to it. We hired him, we put him on the payroll before we had any operations at all. That was mid-January of this year, and by July we had closed on four acquisitions, got ourselves to mid single digits of EBITDA and had a robust enough pipeline, which today stands at over 40 additional opportunities where we brought on institutional partner.

Tim Hall: But starting that kind of ground up business with literally no revenue and no operations would've been something that was [00:05:00] challenging to do in my prior funded environment. So we like the flexibility there. We call that a executive first strategy. There's a number of other sectors where we're looking to do the same thing.

Tim Hall: Homeowners association management has a lot of similar dynamics. Two scaled platforms, high degree of fragmentation. So we're actively looking for an executive to do the exact same play there.

Kison Patel: I'm like bursting with questions to ask you. Now let's just compare this independent, sometimes run as a fundless sponsor model.

Kison Patel: With the traditional fund model most people are [00:05:30] familiar with. Because I think you hit on something where you mentioned you're more focused on fewer investments. I've actually talked to a person that took three reads public, and now they do this model, they don't do that anymore. And I asked, and there was a level of inefficiency in the capital allocation because you gotta go through that whole fundraising exercise and you gotta call on the funds and you gotta go actually invest it.

Kison Patel: You go through the whole liquidation, you've sort of got dead weight in the capital going in and going out. And versus now you don't, you just have a direct [00:06:00] investment. You got investors directly in it. So as soon as they put their check in, check out, it's like direct correlation to the IRR. Am I thinking about it right or am I missing something?

Kison Patel: Yeah, I think

Tim Hall: you are. And there's also sometimes where people are motivated to do things in the overall fund or fundraising context that may not be the optimal decision for that exact company. The temptation to sell a winner early to produce a nice IRR in the fund to be able to go raise the next fund, return some capital to the LPs to have them commit to the next fund.

Tim Hall: So those are [00:06:30] things that we can avoid in this environment. We can be in it for the long term, if that makes sense. And do what's only right for these investments, and particularly in our buy and build model, it takes a while to take that single digit EBITDA company, build the team to go do the m and a, to get it successfully integrated, see the return on the investment in that team.

Tim Hall: So you almost have to have a longer term horizon than you might see a typical 3, 4, 5 year in a funded environment. We generally have a longer term view than that. And if I look over. [00:07:00] My career, the average hold period was about six years of all of my platforms. If I look at how much of the value was created in the back, part of that, more than half is created in the last third because you build the pipeline of m and a, because you build the team to acquire and integrate all those investments come up front.

Tim Hall: You start building your relationships with potential add-ons. You might meet a company in year two that you don't acquire until year four, five, or six because they've got family issues, succession issues, all sorts of things come up. Somebody's going through a divorce. So [00:07:30] it really is a strategy where I think the longer time horizon you have to have that optionality, the better returns you're going to see.

Kison Patel: There is a couple things. There's this almost like fun thinking that you eliminate because now you're directly focused on this business and everybody's all invested in around it, and just making sure that gets optimized for the performance of the business itself and just overall return on that asset versus a broader portfolio play.

Kison Patel: The other part you mentioned?

Tim Hall: Oh, just the ability to get the return on the investments that you've made in the team and building the [00:08:00] funnel of potential m and a,

Kison Patel: the whole period. Yeah. Uh, so the whole period you mentioned, you said you'd typically go for six years and it could be even longer than It could be longer.

Kison Patel: Yeah. So there's no like quick flips that you're working

Tim Hall: on. There's a fixed timeframe in the SPV documents, which were supposed to try to sell the company, but we've really oriented our LPs to be, why not keep compounding our winners longer and they're well oriented. Then the alignment with the personal capital, the significant personal capital I put into each deal really helps people know we're gonna make the right long-term multiple of capital decision rather than [00:08:30] some fund driven decision.

Kison Patel: Okay. So if to take me a kid from the street and teach me how to create an independent sponsor, how do I do that? It sounds like first I need people like you. Obviously at a big network, when you found an opportunity, you knew the executive you need to put in place, money is gonna be the other thing. I automatically think of.

Kison Patel: Pipeline, you already mentioned Yeah. You got 40 targets. You're looking at. And then probably a strategy somewhere in there. I don't know. Walk me through this.

Tim Hall: Yeah, so look, the network is something that takes a long time to build. So you can't start with that. The money's [00:09:00] the commodity. So how can you differentiate yourself?

Tim Hall: You can develop a thesis around a sector. You can say, Hey, this looks like this is highly fragmented. There's a reason for consolidation. Not all industries have that reason. There's a reason should it happen now, what are the benefits of doing that consolidation from a synergy standpoint. Does it improve margins?

Tim Hall: Does it make the business more stable and durable, better overall customer value proposition? So we've spent a lot of time thinking about those types of thesis. That's how we came to the funeral home deal. That's how we've come to the pursuit. We haven't yet found our CEO and [00:09:30] platform in homeowners association management, but then we actively start trying to identify the pieces of which we can build that platform.

Tim Hall: So we have a buy-side search firm helping us in the homeowners association management space. They've reached out to 700 companies on our behalf. They've gotten about two dozen conversations with us. We've had conversations with three or four potential executives for that. So that idea that there's a lot of other people out there with a fund and money, but if you can help put this company together, you're really taking your thesis and building it from the ground [00:10:00] up.

Tim Hall: So then your entry point is not a platform multiple, which you then hope to average down through lower price to add-ons. You're really starting by building it with the add-ons. So that is a strategy we like very much and have done several times before. Threaten point and plan on doing again, that's a place where somebody like yourself, who's young and and ambitious can start.

Tim Hall: 'cause you need an idea, you need some energy. You need to be willing to knock on a bunch of doors and hear a bunch of no's. But for every 20 of those, you get a yes,

Kison Patel: I like it. And you know that I'm itching for the next thing now since I've stepped outta the [00:10:30] active CEO role at deal Room. So the number one thesis is really have, what is that unique thesis and point of view of where the investment opportunity is.

Kison Patel: Second build pipeline. And then third is go pitch it. Get the money.

Tim Hall: Yep. And surround yourselves with talented executives to do that, and they work at the same time. There's a lot of very smart people in the private equity business, but it's a very different thing to operate a company from the inside than to observe one as we do from the outside, from the higher strategic level.

Tim Hall: So find an executive to attach [00:11:00] yourself, to make him part of the team. Have him help you in due diligence. Give him the opportunity to invest some incentive equity along that. Those people will pay huge dividends, not only in your execution, but if you show up to one of those prospects with an executive by your side.

Tim Hall: You look different than somebody that just shows up saying, Hey, I've never been in this industry. I've got some money, but that's all you have.

Kison Patel: Okay. Thesis pipeline network with executives. So you got operators lined up. Then go pitch and get the money.

Tim Hall: Yep. Social [00:11:30] attraction show that it's not just a thesis and a theory that you've got some targets identified.

Tim Hall: That's a bit of a juggling game because to get those targets under LOI, you've gotta show you have the money to get the money. You've gotta show, you've got the targets under L loi. So that's the one part of the independent sponsor model. That's a bit of a balancing act.

Kison Patel: We're gonna talk about this. So after you get the money, it's go time.

Kison Patel: You just go execute. Yep. Okay. Okay, so let's break this down. Number one thesis. You do a lot with roll-ups specifically. Let's talk about that. What makes, and you've done it quite a bit, even in your previous career, if [00:12:00] I recall, it was about 12 platforms and over 200 acquisitions that you've been a part of, and I've seen that a lot.

Kison Patel: I've hired, to just be honest, Tim, of all these podcasts I've done, if I were to make any bets, it would either be. Roll up or carve out. Yep. And carve out is something you gotta really learn how to do. But then roll-ups too. You gotta hit the scale.

Tim Hall: Yeah. So I guess the one adjustment I make to what you just said is I, I don't think about them as roll-ups.

Tim Hall: If I think about a roll-up, I think about people that 20 years ago would aggregate a bunch of ebitda, put under common ownership, some of these [00:12:30] structures that were even these poof IPOs that you would do 20 years ago. And hope that is worth more because it's under common ownership of more size. So we really focus on consolidations and integrations, making sure we're building a cohesive company with a cohesive strategy and a cohesive culture and team.

Tim Hall: That part, to me, is the most critical thing. Tell me why, if you start putting multiple different cultures together that don't have the same values towards employees or values towards customers. You're gonna have a completely un unified message. You're gonna acquire something where you've got churn in one of [00:13:00] those, either employee churn or customer churn, and then you just paid for something that is a shrinking ice cube or a depleting asset.

Tim Hall: Our goal really is to find add-ons that we can not only acquire at attractive prices, but then drive incremental organic growth and that incremental organic growth can come from. We're able to reduce costs of a larger entity. We've got a better customer value proposition. We've got additional revenue streams that we can sell to that combined customer base that none of those individual companies can do on [00:13:30] their own.

Tim Hall: Really, if you think about what drives value, it is growth. In almost all of the platforms we do organic growth and then m and a that supports additional organic growth. Costs are finite. There's only so much capital structure optimization you can do, but growth in most industries is nearly infinite.

Tim Hall: That's why we're really focused on that.

Kison Patel: The consolidation play means you're creating a cohesive company, which is why integration's important. This is where that thing that they call synergy comes in because you mentioned the culture where you actually got a [00:14:00] cohesive culture, which allows you to be able to execute on saving the cost, be able to cross sell on their products, and then customer experience, be able to actually improve the customer experience for the broader company.

Kison Patel: Yep,

Tim Hall: yep. Give them better value proposition that can be better service, faster service, more types of services you can provide to them. We find that model quite frequently where an add-on will do, if we have three or four main revenue streams, maybe they'll do one or two. They'll do one or two really well, but there's three and four that the combined platform has that we can then go sell [00:14:30] into them and they've got a cohesive offering, a better service.

Tim Hall: We've got more revenue and a stickier long-term customer.

Kison Patel: You got this clear vision of how you're gonna be number one in the segment because you're gonna get this business, but you see the opportunity consolidating, integrating it, and just being the number one business brand that offers best service, best prices, everything.

Tim Hall: Yeah. That is the hope that we've thoughtfully planned that all out. Made sure that the pieces that we're adding to the. Platform can help us do all of that. Having done 200 add-ons, they don't all go well, but by learning and having [00:15:00] process and planning, we've got a very high hit rate. We do make mistakes.

Tim Hall: We learn from those mistakes. The key thing when you do make a mistake and over 200, you're gonna make some, is recognize that early cut, your losses early, have backup and contingency plans. The amount of time you can spend trying to fix a bad add-on can take you away from four or five or six other good ones.

Tim Hall: We really try to minimize when they happen, but if they do react quickly, try to fix what you can. If not, put it in the past and move on to the next handful of them.

Kison Patel: Backup plan, make sure you have one. [00:15:30] The thesis. These are the key elements of building out an investment thesis. Are there any other factors?

Kison Patel: Is there things you do to validate that thesis or show that it's actually executable? I know we'll talk about the pipeline part, but just,

Tim Hall: yeah, so I, I talked before about the experience from the, the g sort of expert network, making sure we surround ourselves with those people day one. We tend not to hire consultants.

Tim Hall: Consultants are selling a report for revenue. They kind of want you to do the deal, but seeing somebody that's been in the industry for 20 years, and maybe they're a retired executive, they don't wanna run [00:16:00] something anymore, and I talked to three people just like this today in various industries we're looking at, they still wanna be involved.

Tim Hall: They wanna be a board member. They want to be a co-investor. So when that person writes a check alongside me in the equity that's meaningful and says, yes, I will be here, not just for five or six board meetings a year, but I'm gonna spend 2, 3, 4 days a month helping this team learn from my experience and grow and develop, that creates a lot of comfort and a lot of alignment.

Tim Hall: And then secondly, as we were talking about, came in, making sure that the management is fully aligned with us in the equity upside, making sure that they have an equity structure [00:16:30] that's very meaningful to them. Hopefully life changing that for every 50 cents on the dollar that I make, or two to three times on the dollar I make, they make the same amount.

Tim Hall: That they're in it for the long term. And I always view compensation. I wanna be fair at market to slightly above market on the annual comp, but meaningfully above market on the equity incentive. And just to give you an example of that, if you looked probably across private equity platforms, the most common management incentive equity plan or PIU plan might be 10% of the equity upside.

Tim Hall: We have [00:17:00] historically used a 15% model, which is well tested and surveyed to be on the generous side of market time, vested only the thinking there would be 15%, is 50% more to management than 10 obviously, but it's not 50% less. To me it's a little over 5% less instead of owning. 90%, I own 85% and in in many cases almost all, I can show you that my 85% with that additional management alignment and motivation will be worth more than if I own 90 of something that likely is worth less down the road.[00:17:30]

Kison Patel: I actually appreciate it. Earlier before this interview, I was asking for feedback in our situation 'cause I stepped down for the CEO, now I got a credit equity incentive. When he walked in, I was talking to our in-house counsel about how do we do it and you mentioned that, that you package up pretty heavy and it was interesting that I thought you looked at it as equity for the overall management team and then within that you can build that configuration, which in my case was transitioning the CEO.

Kison Patel: If we look at that, like how do you break it down? Is it discretion of the board, the CEO, on that allocation and then need to parse out the CEO separately [00:18:00] because Yeah,

Tim Hall: it is obviously the board has a direct negotiation with the CEO and then. The CEOs in our cases will typically have, depending on the size of the company, the stage at which they're coming in three to 5% of that 15%, we now know than what's left in that pool.

Tim Hall: And typically we will not allocate all of that pool day one. We'll wanna save some in reserve for additional members. We're gonna organically hire into the manager team as we build it out. And then we often will acquire talented management from acquisitions we do. So a good example of that in our pool [00:18:30] platform, the current CEO of that came from one of the acquisitions.

Tim Hall: He's the overall CEOO of the company. And he's got a meaningful equity stake. But we plan that out. Where are we today in terms of our team build out what does our team need to look like to get us 30 or 40 or 50 of ebitda? So how do we build that team? How do we allocate some today, keep enough in reserve so that as that team and that company grows, and there are the CEOs obviously well aligned with you.

Tim Hall: He wants to attract and build the right team, but knows that they have a finite pool that he can use.

Kison Patel: So he keeps some of it open [00:19:00] so that way they find that talent later, which makes a lot of sense 'cause. You want that to carry through your investment period? Basically you don't wanna, unless there's some meaningful thing where you recapitalize the whole business.

Kison Patel: Yeah,

Tim Hall: we do. We have the view that when we receive liquidity, the management receives liquidity. So if we are able to accomplish our goals early and sell faster than the time vested period, everybody's accelerated. If it takes longer than the time vested period, we typically have a piece of the equity at the tail end that only vests on a liquidity event for us all.

Tim Hall: So it's complete and perfect [00:19:30] alignment through the equity structure.

Kison Patel: Is there any interesting ways you find to network with these. Expert operators like the funeral home, you kind of found some folks. Yeah. You start reaching out to the execs and Yeah, so there's a lot of resources to do that

Tim Hall: today.

Tim Hall: Beyond the simple things people can use, like LinkedIn, there's the expert networks that you can pay for the GLGs of the world. There's been a really emergence of recruiting firms that have moved into this model. They will help you source executives. They'll do that for a fee. [00:20:00] That fee is typically because they're sort of doing it on spec.

Tim Hall: Higher than a typical retained search fee where they're getting a third of first year comp. They'll want something more than that. Some of them will wanna put some equity in alongside of you into the deal. But there's four or five firms that we use that really just show us. Executives will say, Hey, we've got a thesis in the homeowners association space, and we have two people showing us executives there.

Tim Hall: We've yet to find that person. Part of it's complicated by, a lot of them have non-compete, so we gotta find the right time to pull somebody outta one of those companies. But those are great resources, you know, using the [00:20:30] network of bankers, of lenders and things like that. One of my most successful deals, a banker introduced me to an executive that had started as a drywall salesman for his father-in-law's company.

Tim Hall: He became CEO of that sold it to a large strategic. Had the entrepreneurial bug and wanted to go start a company again. So I met him in 2010. He had no job and no company. Two years later he got a single branch location up to $2 million of ebitda. We invested then and we invested in a bit of an unusual way.

Tim Hall: We put a small amount of money in his pocket. [00:21:00] Most of our money went on the balance sheet to provide cash to go pursue the acquisition strategy. Three years later, we had acquired nine companies. We got the $58 million of EBITDA and had a very successful exit. But that was an instance where if, you know, I, I just asked a bunch of bankers, do you know anybody?

Tim Hall: I've got a thesis in the space. I need an operator to get started. And it took me two years according that image to get a deal done. Wow.

Kison Patel: Wow. So it's such a key element is having that right operator that can really scale and run it. And the recruiters you mentioned that are getting more in the space, I know you mentioned they [00:21:30] invest co aside, but some of them want, like part of the comp is like a.

Kison Patel: Piece of equity or something. I don't know if they, some will ask if

Tim Hall: they can convert their fee into equity and some will take the fee in cash and then write a check, but it's really in one pocket out the other. So

Kison Patel: I was like, that's pretty interesting. I should get into that.

Tim Hall: Yeah. Again, the nice thing, if they're willing to take their fee and roll it over into equity, they must believe in the individual.

Tim Hall: They must believe in the story.

Kison Patel: Absolutely. That gives you some more confidence. Big piece is getting the right operators, networking from all angles and making sure they're well incentivized in the [00:22:00] equity structure, and then building pipeline is other key element. Sounds like you're doing that even before you had that operator locked up.

Kison Patel: We are, because we wanna make sure it's there. We wanna make sure there's actual Well you're, you're actually validating your thesis because I know I, I'll tell you this, the side thing, I was trying to do that with the data rooms, but then here I thought, oh, there's a hundred data rooms we can consolidate.

Kison Patel: We owned like a small data room product. It'd be nice to just do a pure cost energy, kill everything and just migrate the customers over. What I come to find out was actually building pipeline exercise, [00:22:30] validated that there was only like five real targets. They were terrible. There's something wrong with them.

Kison Patel: They're high, extremely high valuation expectation or just

Tim Hall: terrible operators and it's in place. Yeah. So we wanna see a broad range of targets because for every 2025 companies you engage with, maybe you get a deal done or something like that to do 200 add-ons. The portfolio companies that have been involved that have probably talked to two, three, 4,000 companies to actually get there.

Tim Hall: Wow. So we wanna see breath. We want to test that part of the thesis before we do the deal. So that'll involve making [00:23:00] calls, doing surveys, knocking on doors. Sometimes we do that ourselves where the companies are relatively easy to identify. Let's say they're licensed, for example, which they are in the funeral business.

Tim Hall: You can get a list of operators in particular states, and you can start making calls. We also will use third parties to do that buy-side acquisition search firms that have fairly substantial research organizations, many of them have it offshore. They will scrape publicly available information based on criteria we give them, and then we'll have a funneling process where they bring it back and we do a weekly meeting with them and said, [00:23:30] okay, we've identified these a hundred.

Tim Hall: Which ones do you rank A, B, and C based on whether they fit your criteria or not. They'll obviously then focus on the a's. They'll make calls, the do letter writing campaigns. The goal of that is just get us a conversation with those people.

Kison Patel: There's a, a range of those type of firms. I've noticed there are, there's some that are full end-to-end and they typically want a percentage or some kicker.

Kison Patel: Yes.

Tim Hall: They typically get a percentage of the deal size in enterprise value with a minimum.

Kison Patel: And then there's other firms that do more of just the data aggregation. They either just give you the data or they just set [00:24:00] up meetings and then they leave it to you. And then some either just have a monthly retainer and no picker.

Kison Patel: Or in our

Tim Hall: experience, we've generally like the firms that are more full service, they typically charge a fee. That's some kind of sliding scale lehman type formula where it's a large percentage of the first million, but then it gets down pretty quickly to a point to two points of the deal. There usually are minimums on those, which can create a challenge if you're buying lots of small things.

Tim Hall: But many of those firms will let you cut those minimums if you do several deals in a year where they're getting [00:24:30] enough leverage on the fixed work they did. But that model we tend to find more efficient. And if you can find things on a proprietary basis in a sector where a consolidation makes sense, where you're gonna have synergies.

Tim Hall: Pay an extra two points to a broker that found you. The deal will never make a, a good deal, a bad one. You do both.

Kison Patel: You find your own deals and work with the brokers? We do. Are you paying, like at this stage where you have a thesis, you're validating the thesis by building pipeline, you're paying for that out of pocket?

Tim Hall: Yes. Yes. So in the HOA space in particular, we are paying a buy-side search firm right now who [00:25:00] has not only a success fee but a monthly retainer and we've been doing that for the last four or five months. We hope it'll bear fruit if it doesn't. That's part of the nature of the business. Okay. We take a lot of dry holes and every now and then you find a gusher

Kison Patel: how a pay to play.

Kison Patel: Yeah. I do like that view of scaling it, because I never thought about using buy-side,

Tim Hall: you know? No. It helps you leverage our relatively small team. And then one of the things that we've talked about is the early days of the process. That changes over time. Once you're in a space, you've got a platform, you've acquired a couple companies, it becomes much easier.

Tim Hall: People hear about you. In every one of our [00:25:30] companies, we have a dedicated m and a execution person that helps identify the companies in the funnel, do the diligence, qualify them, get the deal done, and then either go through the integration process or we have a separate individual that will handle the integration component so that person is full-time dedicated to that industry, making contact with people in industry, going to all the specific industry conferences.

Tim Hall: But what we found, if you do m and a well, you acquire companies that fit culturally. You acquire them in, you retain the people. You show opportunity to those people. Our [00:26:00] best acquisition deal sources are the deals we've already done. They bring along a local competitor or a friend, somebody else they know from the industry association.

Tim Hall: Something that said, look, I sold 80% of my company to XY, Z platform. It's been a great experience. Why don't you come talk to us? And that's a huge source of deals. So I mentioned in our funeral platform, we have right now 40 live discussions with potential targets. About half of them come from the first handful of companies we've acquired.

Tim Hall: They're people they know from the funeral directors meeting or the state board or something like that. The sun [00:26:30] zuko opportunities

Kison Patel: multiplies their seed. They do? Yeah. Can you help me understand how you size a market? Because when you mentioned consolidation. You're building pipeline and you're looking at it by region or you're looking at it by revenue location, like how, how do you Yeah, so size, like even the funeral home stuff, like you can go, go across

Tim Hall: America, but it's fairly easy to get national data when you're getting down to like state and local.

Tim Hall: It obviously becomes much, much harder in most industries where you just can't find that level of data. But if you know how many funeral homes are there in Ohio, it's eight to [00:27:00] 900 and you have some idea. Of the volume that they might do. And you can even get some of that information publicly. 'cause most funeral homes post the obituaries on their website.

Tim Hall: So you track enough of those, you can figure out, yeah, this person did seven calls last week and five a week after that. You can then apply some fairly simple metrics to most businesses. So we know what the price of an average service with a bar, we know the average price of a service. With a cremation, you could come up with some size, what does that market look like?

Tim Hall: And probably be reasonably close. And then you could do the same for for many businesses where if you have a couple [00:27:30] of those metrics on the pool service business, if you tell me how many weekly service calls somebody does and what market it's in with where we know the weekly service price based on that customer segment and come up with a pretty good approximation of revenue.

Tim Hall: Or you can do it by. Looking at the number of trucks they have in the picture on their website. We know roughly what a truck will produce in pool service revenue on a weekly basis. So there's lots of ways to come close. I notice

Kison Patel: every industry does that. They find something like really obscure that you don't think about.

Kison Patel: It's not, but the operators always

Tim Hall: know Exactly, because that's how they think about it. If I add a truck, I'm [00:28:00] gonna spend X dollars on an incremental labor, and I'm gonna produce three times that in revenue. So the operators usually know.

Kison Patel: Yeah, it says either the number of trucks, number of chairs in the office, like whatever it is.

Kison Patel: Yeah. But it's, that's your real metric. Those,

Tim Hall: those are the unit economics that an operator probably thinks about in their head. And maybe it's not on a big spreadsheet, but that's really what, that's how the money's

Kison Patel: made. Yeah. You can't lie that the numbers, it just, here's your hard asset. You know how much money you can make on it.

Kison Patel: Okay. So I, we start building the pipeline that's looking good and then I, when I go out and I raise money for this, this is kind of interesting too, because I feel like some [00:28:30] people are really lucky. They come from a private equity ecosystem and they just have friends to call. Yep. What if you're not, you're just me, the kid from the street.

Kison Patel: Where do I begin to start networking? And really, and to me, I feel like it's a relationship and it takes time to build,

Tim Hall: it does look, obviously, it's easier if you have a track record. You have long tenured experience doing this in the private equity space. If you have meaningful personal capital to put into the deal, that creates that alignment.

Tim Hall: That makes it a lot easier for an institution to say, Hey, you're putting three, four or $5 million in [00:29:00] this. I'll do some multiple of that. But if you're young and you're starting out, you don't have that, you're gonna have to network really hard. You're gonna have to be scrappy. You may have to make some sacrifices on the terms to create that alignment where maybe it's a graduated return structure where you don't make that much of the profit if the deal's less than a two or two and a half times multiple of capital.

Tim Hall: But if you do better than that, you worked it real hard, you showed your scrappy, then you can get the kind of more normal economics, I'd say for, for people that are young, independent sponsors. The good thing is in the [00:29:30] last 10 years, but really in the last five, there's been a huge increase in the amount of interest of investors in independent sponsored deals.

Tim Hall: They generally like the lower end of the middle market where most of us focus, you can buy. Single digit EBITDA companies, often outside of an auction, you can put the deal together yourself with a team and a thesis. They don't have to commit to a blind pool fund for 10 years where they're paying a bunch of fees.

Tim Hall: They can decide whether or not they wanna do that deal. It is a lot of work. You're gonna get a lot of nos. We started, 18 months ago, we went out to about 60 [00:30:00] potential LPs. We've now narrowed that down to a group of 5, 6, 7 people that, two of which we've done multiple deals with. They're in each of our platforms, or at least two of our platforms, and the remaining, we think there's a high likelihood we can get a deal done with 'em.

Tim Hall: They like our investment style. They like the end of the market. They've done a bunch of work on us as a team and know what we're like. So it's gonna take you a while to work. I'd start that process early. There's obviously some conferences you can do to go to that, that are specifically independent sponsor focused conferences.

Tim Hall: We've gone to many of those, like [00:30:30] a lot of things. It's a probability game. Give an example. We went to the McGuire Woods conference last year. There's probably a thousand independent sponsors at that conference. You have 30 meetings, 40 meetings over the course of two days, and a lot of those meetings go nowhere.

Tim Hall: But we found the investor who's the lead LP in our last deal and one of the two lead LPs from that conference. It does bear fruit. You're in a business where you know you're gonna have to have a lot of nos and a lot of swings and misses, but you'll connect every now and then. It's

Kison Patel: an independent sponsor model.

Kison Patel: And also search funds have become extremely popularized. Yep. I dunno what they're [00:31:00] doing in the MBA programs, but so many of 'em are coming right now. Yeah, it's, I think there's actually an acronym for it that they have. I, if somebody knows, tell me, I forgot what it's called, but it's basically the entrepreneur,

Tim Hall: right?

Tim Hall: To a search fund type platform. Yeah.

Kison Patel: Yeah. Gonna be a search is like a thing that's called, but it's like a big trend right now because I get 'em. We used, when I was running deal room, I get a lot of inbound inquiries and I'm just,

Tim Hall: yeah, it's an interesting model. So that's the blend of the independent sponsor, but somebody that wants to be an operator and actually go.

Tim Hall: Go run that company.

Kison Patel: Yeah, exactly. Exactly. I you're talking about like pretty young. Yeah. So it's, it's, you know, where a lot of the advice, yeah. Look,

Tim Hall: I took a much [00:31:30] more conservative path outta business school to go work for GE Capital because I frankly needed the paycheck to pay off my loans. But if you have that optionality, you're young, maybe you don't have family obligations, you're still a single individual and you can afford a swing at a miss.

Tim Hall: It's a great thing to try.

Kison Patel: Okay, so let's break down the difference for those who may not be familiar. Search fund is basically you're gonna buy, find, identify a business, you raise money, but you're actually gonna operate that business. You run it through to an exit and return the, so you're gonna

Tim Hall: do one thing as the sourcer of the deal and the operator for the next three, four, or [00:32:00] 5, 6, 7 years.

Kison Patel: And then as an independent sponsor, let you take that one.

Tim Hall: Yeah, you can do that across several platforms. You're not gonna run it. You're gonna build the thesis, you're gonna identify the platforms, you're gonna build the executive team that run that for you. And if you're successful, have your hand in several different things at a time, rather than be dedicated to one.

Kison Patel: Now, how's the business model? Traditional private equity fund is typically a two 20 management fee. Yep. And then 20% of profit share. What's that look like between other models? Yeah,

Tim Hall: so the, I'd say a key difference is the 20 you mentioned. The carrier or the equity [00:32:30] participation in my experience, is often structured in the independent sponsor world where you earn less than that below a two x, maybe it's 10% above a two x, you can earn 20, or in many cases more if you have higher return hurdles, you hit a.

Tim Hall: Three or four times multiple your capital, you can typically see a premium carry. The other difference though is you do not get the 2%. That 2% is on the funds committed capital. So not just on the invested capital. You only get fees typically from the actual underlying portfolio [00:33:00] company 'cause you have no investors that have committed to you to charge that 2%.

Tim Hall: Ah, interesting. Most will let you take a deal fee from the company based on a percentage of enterprise value, one to 2%. Some take it in cash, some roll it over into the deal. Most will let you take a management fee, percentage of EBITDA, usually with a floor and a ceiling. And the idea of those is just to keep the lights on, not to make you rich, but not have you worrying about, Hey, am I gonna make ends meet and can I do this for the next four or five or six years?

Tim Hall: 'cause that would not be in the LPs interest to have you [00:33:30] thinking about something else. But the money really will come 90, 95% of it on the equity piece, not the fee piece. So that's probably the primary difference, which means you've gotta have enough of a nest egg to go without comp for a while. To invest some money in debt, deal expenses, due diligence, expenses on accounting or legal or travel that didn't turn into anything.

Tim Hall: That is one of the challenges of the independent sponsor model. It's gonna take you some financial commitment to do that.

Kison Patel: Exactly. And then on a search fund, you won't have some of that 'cause it's just directly going in the company, but it goes back to more of the [00:34:00] equity incentive or is there different, is it still Yeah.

Tim Hall: You would normally have a very similar equity incentive for putting that deal together and running it, and then you'd have a salary from that company or something like

Kison Patel: that. Got it. So can we, when you talk about getting the money, you talked about some different investors, but what are like the walks of life of different investors that you'll find for the beer business?

Tim Hall: Yeah, so I, I guess I've found them in a couple of main flavors where we focus for our types of deals. One is I generally like family office investors. They have substantial capital. They [00:34:30] have usually a singular objective, which is return on capital, multiple of capital. They typically, if some member of the family is involved or maybe only one generation away, they made their money doing something like this.

Tim Hall: They made their money being an entrepreneur, starting a business, growing a business, building a business. We've liked those types of investors. And then we have other institutional investors, but we've really gravitated towards smaller firms with a dedicated focus on, or a significant focus on the independent sponsor model rather than a generalist firm [00:35:00] or public.

Tim Hall: Public money is one that I've just generally avoided. That tends to come. State pension funds and things like that have all sorts of other constraints and regulatory issues with it, so we're still refining our model there, but we've got a pretty good stable of relatively small people with a dedicated or significant independent sponsor model and family offices that can write substantial checks.

Tim Hall: You've pitched a lot of investors. I have, yes. What's it like getting a yes? It's very gratifying. It never comes, usually in one stage. So it's a sort of just like your [00:35:30] diligence on a deal. It's a progression of. Signals and signs. How much time are they spending? Are they digging in? What types of questions are they asking?

Tim Hall: Who is attending the meetings? Who's attending the sessions? Is it the senior folks, the decision makers on the team? I've been fortunate that two of the three investors, actually all three of the investors are well-known to other friends of mine from the business, have invested with them in the past, supported them in their evolution from independent sponsors to many cases, a funded sponsor environment.

Tim Hall: That was very [00:36:00] good. Kind of mutual comfort. The investor being able to do due diligence on me through people that are already invested in. Me being able to understand what are they like as an investment partner?

Kison Patel: So seeing their interest, they're asking questions. They got some more senior folks attending.

Tim Hall: Yeah, I always flirting.

Kison Patel: A lot more flirting happens.

Tim Hall: I always tell the people, the more questions they ask, generally, the better I feel. That means they've done the work, they've read the material, they've been in the data room, they've been through our investment memo. They're trying to figure this out.

Kison Patel: You gotta get that inclination that these people are really interested.

Kison Patel: And then how do they deliver the yes. They [00:36:30] call you up and be like, we're in. And well,

Tim Hall: again, it's usually a series of stages because they have to go through their own committee approval process. We'd like to do this. What are the terms? What would my allocation be? Do they need to do the whole deal themselves or are they willing to split it with somebody?

Tim Hall: In our first and second deal, we essentially had one large institutional investor and then a f. Fairly substantial number of friends and family. These are prior colleagues of mine, executives that work for past portfolio companies, bankers, lenders, things like that. In our last deal, we had [00:37:00] two institutions with the idea of let's broaden our investor base.

Tim Hall: Instead of having two or three people, let's make sure there's five or six people that wanna do deals with us, that we will soon be able to call repeat partners on deals.

Kison Patel: How do you frame that? Are you telling people directly, Hey, our goal is to get five different investors on this? Or is it flipped around?

Kison Patel: Are they the ones you know, Hey, we're interested? Maybe, so it varies.

Tim Hall: Some of the people that we are talking to, if we're looking for, in the last deal there was $47 million of equity, could do. 3, 10, 15, something like that. They wouldn't fill out the whole deal themselves. There are [00:37:30] others that are capable of doing the whole thing and wanna do the whole thing.

Tim Hall: And then in this case, I went to the partner that wanted to do the whole thing. They were our sole institutional investor. And the last one I said, look, we wanna diversify our base. We love you guys, we wanna do more deals with you, but it's, it's obviously necessary for us. You're not gonna wanna do everything with us.

Tim Hall: To have multiple people we can call on to build that base of 5, 6, 7 people, that they're really gonna be our go-to calls and instead of calling 60 people in the future, we're gonna call 10 and have a high certainty that two or three are gonna want to get there.

Kison Patel: That's interesting. I [00:38:00] always had this assumption.

Kison Patel: Less the better. Yeah. Less cooks in the kitchen and it just streamlines everything. Yeah. I ask like, bootstrapped a company all the way up. Gimme the thinking on why you wanna diversify investors.

Tim Hall: One is simply because not every deal is gonna fit with somebody's investment strategy or experience. Strange things happen.

Tim Hall: Somebody is on an investment committee that had a bad experience in a similar company, or maybe they think it's a similar company and it's not. That gets them to a no. There's a lot of reasons for somebody to say no to an investment. So having some diversity there. But I also think you [00:38:30] learn from people's experiences.

Tim Hall: We treat these LPs as partners. We wanna learn from the questions they're asking and the experiences they have. I can guarantee on every diligence call we have through the cycle, they came up with something we didn't think of and we go research it. We diligence and we figure it out. So I really view them as additive.

Tim Hall: We want them to be engaged and in many cases they are taking a board seat or a board observer seat. They're there to help us learn from the 50 other companies they're involved in.

Kison Patel: Is there anything you've learned around raising the capital, the board structure [00:39:00] that you wanna teach me?

Tim Hall: Like on the m and a side, picking your partners is really important.

Tim Hall: So making sure that they are in it with us, they're aligned, they want to be in this long term. They're gonna be patient capital, they're gonna support us to grow aggressively. They're gonna be there if we need them in the, you know, eventful, rainy day. By the way, we don't ever just leave that to the investor wanting to support the company in the event that something bad happens.

Tim Hall: And it does. We had the financial crisis, we had COVID, we often always structure our deals. So there is callable reserve capital [00:39:30] that they have to commit to contractually where we can say, Hey, we've got a great growth opportunity, or some other global event has happened and we know if we survive this event, we're gonna be fine.

Tim Hall: We want to know we can call capital. And by the way, I have to put in Prorata along with that, that provides them great comfort that I'm putting in a dollar. They're putting in three. So that's something that is in all of our S, is that typically

Kison Patel: like a percentage of the total amount? Yes,

Tim Hall: and that percentage can vary based on how much you think you're gonna have opportunity to grow at how much equity financing capability you'll need compared to the debt financing capability you'll have.

Tim Hall: That [00:40:00] really is somewhat dependent on starting leverage and starting size, but it does vary. Typically, the reserve 25 to 33% of the initial check. So a decent amount. Okay, okay. In some cases I might like to make that larger, but the LP is gonna sit there, say, Hey, I don't know if you're actually gonna deploy this.

Tim Hall: I understand having some reserve, but 50% might be

Kison Patel: too much. It's good. That's actually a good thing to have. Then you don't have to scramble around if something happens. Exactly.

Tim Hall: It helps when you're talking to the company, when you're saying I'm an independent sponsor, but once we get this deal done, we do have callable reserve capital.[00:40:30]

Tim Hall: It's also important to our lending partners. They wanna know that we've got capital to support the company in good times and bad.

Kison Patel: I like that. This is good. I just asked you to teach me something and I learned something totally new. So hopefully there's something I've learned over 29 years that I can, that I can share that's valuable.

Kison Patel: The board dynamic. I'm curious about that because at some point I have to do it because I boot, I bootstrapped the business, but I eventually wanna support an acquisition. Yep. Do I strategically start growing the board now? So it's Oh, I give up the one seat, but I already control the other three. Yeah. Or do I just wait till something happens and [00:41:00] then structure it?

Kison Patel: So

Tim Hall: I'd encourage you to think about it now. We build our boards primarily as an advisory function, not necessarily a governance function like you might see in a public company. So in all of the situations, we as Brenton point control the board. We can appoint and remove people, but we treat those people very much like partners.

Tim Hall: We do compensate them in cash equity and their investment in the deal. We want them to be engaged. We really want to think about them as advisors to us and to the management teams. Our board meetings are not. Much about [00:41:30] governance at all, the really strategic growth and value creation discussions. What are the main opportunities ahead of us?

Tim Hall: What are the main challenges and risks we're seeing today? What do we need to do to put in place a team and infrastructure to be successful? How can those board members with their network and relationships help us? I'll just give you a couple examples in our pool deal that outside board member I had there led a high level, big picture, strategic discussion after our May board meeting.

Tim Hall: This is not what's gonna happen in the next month or quarter or even years. What's this industry gonna look like in five or 10 years and how do we get ourselves ready for [00:42:00] that with people and process and technology? That was very useful. There's also a fairly big procurement element to our acquisition synergies.

Tim Hall: So he's brought in somebody that did procurement for him in a very large company in a chemical manufacturing business. He's doing a part-time assignment helping us figure out where we can get some additional purchasing leverage as we grow. So those are the type of value add activities we like to see the board members doing.

Tim Hall: They're not just sitting there to to be a yes or no vote or rubber stamp, something they're contributing. Be

Kison Patel: strategic, make sure this board's gonna be accretive.

Tim Hall: Yeah. You pay them. [00:42:30] We do. Yeah. We pay them Typically cash equity outta outta the profits interest plan and then they invest in the company. I can't think of a situation where we've had a board member that did not invest in the company, did not wanna invest in the company because they saw the opportunity.

Tim Hall: So they get the accretion on that, obviously without paying any carry or anything like that.

Kison Patel: So what's like the range that you would get of board members investments? Yeah. Either their, not investments, but even their allocated equity that you give them. We did a advisory board for the company. It was a quarter [00:43:00] point over four years for an early stage company.

Kison Patel: Yeah.

Tim Hall: There's a fairly wide range. Look, the cash is the least significant thing. What is that? You do 75 to a hundred thousand dollars a year, and that's five board meetings scheduled. Every acquisition has a board call. Special topics, maybe that board member will go help us port an acquisition, assess a new member of the manager team we're trying to hire, something like that.

Tim Hall: Equity can range from a half a point to two or more, depending on how active they're going to be in, in helping that company develop. And then [00:43:30] their investments have been all over the board. I've had people that would do as little as two 50 and had one board member who invested 5 million in the company, he was quite happy.

Tim Hall: We made 5.4 times our money on that deal that he put a fairly significant chunk of change in his pocket, but he was very value add.

Kison Patel: Okay, that makes sense. So you do, if you're gonna pay money from them, incentivize them. You want to get the best board member you can find. Yeah. Okay. So we got the yes. You know, so to get the inclination with their interest that they're gonna say yes, they say yes, you sign paperwork and then at this time.

Kison Patel: Do you have [00:44:00] deals at LOI or is it just purely a fundraise? We already have pipeline, but now we're gonna go back to those ones that are hot and ready and start getting 'em an L oi, like where are you at with the actual target beyond these three platforms that, uh, that we've done so far? Do we have other opportunities under LOI?

Kison Patel: I'm just saying like when you're at that cycle of going to execute on one of these platform plays, like you raise the money.

Tim Hall: Yeah. So generally yes. Something under L loi, you do have platform. We had an L oi, we had a 60 day exclusive period to finish our due diligence and raise the capital and then raise money.

Tim Hall: Okay. That, [00:44:30] that's an aggressive timeline

Kison Patel: or this, you socialized the thesis? We socialized the,

Tim Hall: before the L loi we've identified investors we think will like it sometime about halfway through there, when we've done enough of our due diligence, we'll deliver our investment memo, which tends to be a 40 to 60 page PowerPoint deck that explains our angle, how we're gonna add value to this, what's the industry look like, why this company, how are we gonna execute, what's the market dynamic?

Tim Hall: What are the targets? Obviously full financial model and then in the. Month after that, we're [00:45:00] figuring out which investors really wanna do this. We're getting them the confirmatory due diligence, whether it's legal or accounting or things like that. So it's a, it's a lot to do in a relatively short period of time.

Tim Hall: Now, normally that 60 day process gets extended a little bit. The main reason for that is typically most companies that are four or five, 6 million of ebitda, privately owned, maybe no debt. It just takes them longer to respond to the due diligence requests than they expected at the outset. Then it's game.

Tim Hall: But we can move quickly.

Kison Patel: Game on. I wanna skip over some of those getting into closed steps because we [00:45:30] talked about this podcast enough, and you can listen to other interviews and get that. What I do wanna talk about is integration, because you started this podcast with this view that you just can't slap companies together, consolidate revenue.

Kison Patel: You actually have to build this business, and you talk through the thesis of having a real vision of building, essentially, an empire that has a strong company culture. A strong brand delivers value to the customers. I wanna understand because so much of what I'm realizing is evolving is integration thinking around these kind of consolidation plays and [00:46:00] buyers are actually getting smarter where if they see the smoosh together companies, they're deeply discounting valuation.

Kison Patel: Yeah. Because they know there's a backlog of integration work to do. So I really wanna understand of how do you think through and execute integration? Yeah.

Tim Hall: If I would say acquiring a company is easy, integrating it is hard. So we focus a lot more on the process around the ladder. It does start with making sure you're buying the right team and the culture.

Tim Hall: They're gonna be your partner in the integration. We're going to affect change at both companies, both the platform and the add-on to be able to get [00:46:30] an integrated get to synergy. And that could be everything from procurement to maybe there's some facility consolidation, there's changes to the management structure.

Tim Hall: There may or may not be changes to the name of the organization, which sometimes has been around for generations. So you wanna make sure you have that alignment going in. How do you get some of that cultural alignment instead of, what metrics do they look at? Do they look at things like employee retention and satisfaction?

Tim Hall: Customer value, customer satisfaction, are those types of things aligned with you? And then a lot of it's just spending a bunch of time with them, making sure we're having several [00:47:00] meetings, a lot of FaceTime, we're walking the facilities with them. I always look at, for an executive, how many people do they say hello to you as you walk the floor, you go through the distribution center, how many people do they know by name?

Tim Hall: Those are good, soft, yeah. Indicators of culture that are not on a report somewhere, but they tell you how is this company run and what's the overall kind of management style? And you can tell

Kison Patel: when you, when you walk in the office, people are, are jiving together and you can

Tim Hall: tell is the facility clean? Is it neat, is it orderly?

Tim Hall: Uh, do people seem energized? Making sure that mostly our management team is spending a lot of time [00:47:30] doing that. And then it's having a discipline process. So we start that before we even begin talking to a acquisition target with criteria, what are we looking to buy? And let's make sure we write that down and we stay true to that.

Tim Hall: And we don't vary that. We said we were gonna buy companies with these three attributes. We found one with two of those attributes or maybe some different attributes and you go buy it anyway. Right now you're immediately off strategy. So we write 'em down, and in the case of the pool company, they really come in, what I'll call sort of three flavors for a larger deal.

Tim Hall: We're gonna move [00:48:00] into a new region, a new geography. We'll call that sort of a hub. I wanna find a substantial, capable, sophisticated management team of a certain minimum size. It has to be something where we say, we can add other companies to this and they can handle that, and they can help us grow this territory or this region.

Tim Hall: So finding that then allows you to do one step down from there would be what we may call a spoke, right? It's a smaller, less capable company. Maybe it's a couple hundred thousand of EBITDA to maybe a million. It wouldn't be something you'd say, I can double, triple, quadruple this. But it [00:48:30] fits into that hub.

Tim Hall: And the two things are additive. They're additive now because we can take costs out by having one warehouse facility, or we have overlapping routes for the pool service business where we can start to say, we can make it more efficient. We can service more pools per mile driven. We have a savings on procurement of chemicals and supplies and things like that.

Tim Hall: We have the ability to provide employees better career development opportunities. Somebody can go from a pool technician to a regional manager, things like that. And then the last one we'll do are really pure [00:49:00] route wise, where we're essentially just buying a customer base from somebody who's maybe just tangentially in the pool business.

Tim Hall: A specific example, we bought a bunch of routes from a guy that delivered heating oil that's a winter business. He happened to have this small pool business, but wasn't really focused on, it wasn't making a lot of money. When we bought those customers, we retained a very high percentage of them. We put that revenue on our existing cost structure and we had to add some trucks, we had to add some people, but it was right in our existing service area.

Tim Hall: So we've done several of those. But having those written criteria and to make sure you [00:49:30] don't vary from them, and it's not just what does that company look like? How are we gonna structure the deal? So that hub has to have a substantial amount of rollover equity, so we know that person is going to be aligned.

Tim Hall: Helping us grow that business. The route buy has no rollover equity. That's our most valuable form of currency. We don't want to give it away if we're not trying to incentivize management. And then the spoke is somewhere in between.

Kison Patel: You gotta have both. The culture test is important. The office test.

Tim Hall: Yeah.

Kison Patel: Get a good sense of what that's like. But then having a real discipline criteria actually gives you more of something that's [00:50:00] tangible in your strategy as well. Because now you'd be laid out, here's three different directions we go and why. So once we get that defined, what are the other things that we move into when it comes to executing integration?

Kison Patel: Because, yep. I've worked with your team on this. I've talked to a number of, uh, yeah, I love it because you guys almost work like a, essentially the strategic, there's a lot of upfront planning on how you

Tim Hall: Yep. So to get it from prospect to a closed deal, we have a very standardized process as well. We have protocols for a deal above a certain size.

Tim Hall: We're gonna use this law firm [00:50:30] below a certain size. We'll do this one. Above a certain size, we're gonna do a full quality of earnings review. Below that, we'll do a cash proof with a single individual. Who does that for us? Who knows the pool business. So the approach to due diligence changes based on on the size of the company.

Tim Hall: We tend to have relatively standard middle of the road form agreements just to make the negotiation side easy. In the example of those route buys, we literally do those with a bill of sale. There's no merger agreement or purchase agreement. It's two pages and uh, that's about it. We walk away with the assets, which is [00:51:00] primarily the customer base, and they walk away with some cash.

Tim Hall: So we try to make that a repeatable process and we track that all in deal rooms who our full team can see that. As I said, in the case of Easton and each company, we do have an m and a execution lead. In fact, in Easton, we have two that you've interacted with that really do not focus on the operations.

Tim Hall: They are full-time deal execution and integration. So they really help coordinate all the resources we need to bring to it. That's the accounting and finance team, hr, marketing, ops team, procurement, all of the things we need to [00:51:30] do. To make sure we know how we're going to integrate the company day one, and that we can start acting on that, not just day one.

Tim Hall: Frankly, a lot of that stuff is happening before we even close the deal. We're thinking about how we're gonna optimize the routes or what the infrastructure will look like, or what synergies we think we'll be able to get from our vendors on procurement and things like that. But then it really goes day one where the bulk of the work begins.

Tim Hall: And this is something where I've used lots of data room products before up until the time the deal was done, and then they just become a filing cabinet after that. But we use [00:52:00] deal room to help us execute the integration. So there's 150 point checklist that covers everything that you can imagine from.

Tim Hall: We're gonna take control of the cash, we're gonna convert the payroll, the benefit systems, we're gonna change the signage if we do that, but a lot of it's around communication. So some of the key things day one is how do we take this company that's just gone through an acquisition, they've worked for the last 20 years for the same founder owner, and how do we give them comfort that it's gonna be okay?

Tim Hall: This is opportunity. This is rare advancement, opportunity, and a broader platform for you. So there's a lot around [00:52:30] communication. That's meet and greets. That's town halls, that's written communication, that's our management team. Telling people and truly having an open door. If you've got questions or concerns, come to me.

Tim Hall: We're happy to talk about it. We want you to be part of this team. We didn't just buy some trucks and a warehouse. We bought the people out in the field that do the service. So that initial communication goes a long way to comforting people and giving you the time to get things integrated. But the deal, room process tracks all of that.

Tim Hall: It has all of our communications. Who's gonna send it out, when, who's gonna go visit? Which facility? What are the [00:53:00] things we need to do to get the synergies out of the deal? It's across the platform. It's all live. So all of our checklists, all of our templates, all of our forms are loaded up into there.

Tim Hall: Anybody in the company that's got access to that platform can see what stage are we and we're hitting our timeline in the HR and benefit stuff. Is it green, yellow, red? Who's responsible if we're behind? And that includes the CEO who goes onto the platform and COO and look frequently 'cause we've now done.

Tim Hall: In 16 months, eight acquisitions, there's overlapping integrations going on. So we've gotta figure out how to balance the team. And then [00:53:30] another great thing it does is it lets us track the synergy realization against our original plan. So are we hitting the numbers that we thought we could on procurement or cost takeout or revenue enhancement opportunity?

Tim Hall: That's a great way to validate our assumptions. Refine our assumptions on the next deal. But when we go to sell and we can show the buyer that yes, we can improve EBITDA in the relatively short firm on a cost basis by 25%, primarily through procurement, that really helps somebody understand, okay, now I go buy a [00:54:00] add-on for five and a half, six times, and I increased the EBITDA by 25%.

Tim Hall: Now it just took a turn and a half or so. Off the multiple. That is something that will not only create more EBITDA exit, but we'll create more multiple for our platform to the next buyer. It's a very effective system, and again, it's something our team uses. We are using it universally across the three portfolio companies, although the, the one that we closed today is not yet using it, but we'll be committed to implementing that platform there as well.

Kison Patel: What is the steel room thing? I,

Tim Hall: we

Kison Patel: should put a

Tim Hall: disclaimer. You're a

Kison Patel: customer.

Tim Hall: I have a customer. We use it at Brenton [00:54:30] Point. We use it at the Eastern Select Pool platform. We use it our landmark funeral services platform and our company that closed today, not yet announced, we'll be using it as well.

Kison Patel: And just to get it straight, you're using it as this platform to run all the deal execution, which is you standardize the process we described.

Kison Patel: Mm-hmm. And then your integration process has also been standardized. Right. And then you will also use this for collaboration amongst your different teams, like you're supporting your deal leads, and then also the function leads that are involved with the integration. And [00:55:00] then you also are using this for the seller onboarding, bringing the employees through and making them comfortable with some visibility in the process.

Kison Patel: Yep. Helping

Tim Hall: manage that communication process. And then, as I said, when we get there to sell our company, our platform, we will use that to validate buyer of the platform's assumptions around the acquisition integration, how far along are we, what are the synergies we've realized? What can they expect to realize going forward in the future?

Kison Patel: And then, yeah, you

Tim Hall: got all the synergy

Kison Patel: tracking right there. Yeah. So that kind of gives you that full picture story. So yeah, [00:55:30]

Tim Hall: I can't tell you how many times we've gone to sell and after doing 30 acquisitions we said, okay, now we gotta go add this all up again and, and try to quantify it and dig through years old files and approval decks and things like that.

Kison Patel: So you almost have like this portfolio thinking where you can track all that and everything going on. It's pretty cool. I love hearing this stuff. We're glad we founded

Tim Hall: actually the CEO of the company founded on you through a podcast like this that you did and he listened to about scaling through m and a.

Kison Patel: Yeah. And disclaimer, that's not a hard push on this, but every, [00:56:00] everybody's got a system that helps support this, and I think it's gonna be important with the way AI is evolving and we're just seeing more and more examples of ways to automate diligence.

Tim Hall: Yeah. We are interested to see how that can streamline our process, whether that's contract review or some of the more mundane, or I'll say expensive things that we pay people to do manually that probably won't be that way in the future.

Kison Patel: Absolutely. So all said and done, I'm truly an advocate of just a buyer led process. You should control it like you just gave examples of sourcing deals and then also examples of really front loading the integration. So that goes [00:56:30] smooth. Making sure you got the right team from the beginning, from the executives and acquiring, making sure there's a good culture fit.

Kison Patel: Those are all things buyer led. You're lazy on it. You let a banker book dictate how much you're gonna bid. Probably gonna screw those things up.

Tim Hall: That's the view. Look, there's well north of a thousand private equity firms, so thinking that you're gonna wait for a banker to send you and 50 other people a book and achieve some outsized returns doing that, that's a hard game.

Tim Hall: So we like to play in places where we have less competition. We have an advantage. We found something in our proprietary basis. [00:57:00] We sold more than just our money. We've brought a team to help us execute on that strategy.

Kison Patel: Outside of using the best MA technology in the world, what are the key things you gotta get right in like the first, everybody always refers to the a hundred day plan, which I think I'm realizing you keep stretching things out longer than that.

Kison Patel: People are just gonna have fatigue and I'm assuming that's why it's defaulted to the 90 a hundred day.

Tim Hall: Yeah, I, it's a big initial push to try to affect some immediate change.

Kison Patel: People know there's an end like a hundred days we've already done. Yeah. But it

Tim Hall: affects the trajectory year on if you don't do that, if you don't start getting in there and [00:57:30] changing the extent you have to culture and team and setting goals that can be challenging beyond, there's a few other tools.

Tim Hall: We use some executive coaching beyond the a hundred day plan. There's a one page strategic plan that we like to use. One page strategic plan. It's the dense page, but it captures everything from what are the next months, quarter year goals, five year goals, team culture, what's the big sort of like grand slam vision of what we could become.

Tim Hall: How do we think about our mission statement, our vision statement, all of that stuff is on there. And again, it's dense, but what's [00:58:00] nice is it is all there on one page. We give it to a wide group of the employees so they know where we're going. And you can sit there and look at it. You can pin it up at next to your desk and say, Hey, are we aligned?

Tim Hall: And this is something we use at the board level, but the management teams embrace as well.

Kison Patel: So you define that North Star with this one page strategic plan and it's referenceable. Yeah, that sounds like a really key thing. The simplicity

Tim Hall: and the focus of it. You could say that it's a hundred of things I gotta do, but there's usually three, four or five that if you do those, it's gonna drive a lot of your success.

Kison Patel: It's getting the teams aligned on the priorities. Good tool platform in place. [00:58:30] You obviously got your deal team execute, make sure they found the right deal to begin with. And that sounds like pretty good. I don't know if there's any other. Gotcha. Ultimately the function's gotta deliver as well. And

Tim Hall: yeah,

Kison Patel: it's been

Tim Hall: a repeatable formula for me where we've typically been able to acquire or own the EBITDA for five to six times because we bought relatively small companies.

Tim Hall: We drove synergies, we drove organic growth, but because we built all that team process infrastructure to allow us to integrate, but allow the next owner continue to grow [00:59:00] organic, continue to grow through m and a, we've typically sold at 12 to 14 times EBITDA or more. So a doubling of the multiple and that sort of earned arbitrage as I call it, is something that's a pretty durable model.

Tim Hall: It's really not dependent on cycles of private equity or asset valuations is something you can do through all sorts of different business conditions.

Kison Patel: We talked a lot about the good stuff, which obviously is a lot of hard work that goes into this. I'm curious about the gotchas. Even when you talk about doing this consolidation, scaling, I'm automatically thinking about the, yeah, obviously a tech guy, I'm thinking about the tech [00:59:30] infrastructure and at some point you're gonna need like a enterprise ERP system.

Kison Patel: Things like that, and I gotta start consolidating on it. And I, I feel like there's some overhead of integration that can get expensive.

Tim Hall: Obviously, we all make mistakes. I've certainly made my share of them figuring out ways to, to minimize them and mitigate them when they happen. So one, obviously the private equity industry is leveraged.

Tim Hall: We use very modest leverage the pool business, we started with zero zero leverage. The funeral business, we started with zero leverage. We're leveraging those now as we grow capability and size and scale generally. I started in the threes [01:00:00] to mid threes times leverage. If you build team and diversity, maybe that goes up into four foreign change.

Tim Hall: But I've always viewed leverage as something that should enhance the returns, not drive them. If it's driving them. You don't have a good fundamental. Business driven value creation strategy. When you say

Kison Patel: leverage three on on, on

Tim Hall: the ebitda. On ebitda. Three. Multiple of ebitda. I remember software like that.

Kison Patel: We we're only thinking revenue these days. Yeah, yeah,

Tim Hall: yeah. No, relatively conservative. So that you've got the ability to weather bad times. You've got plenty of cash from the EBITDA to cover your fixed charges, and I lived through [01:00:30] 2008 and oh nine with a levered building products company. We all live through COVID.

Tim Hall: Preserving that optionality coming out the other side will make a huge difference in your overall return. If you get stopped out during that because you didn't have staying power, you get a big negative return. So avoiding that. Hiring the best manager team that you can, when you've made a mistake, admit it.

Tim Hall: Get rid of them early. I can't ever think of a situation where I've heard somebody say, I terminated that person too early. It's always too late. We do absolutely wanna be partners with our manager team in long term. We have many [01:01:00] repeat partnerships, but they don't all work out. Sometimes people can't scale with a business.

Tim Hall: Sometimes somebody that's been in a large corporate setting can't come down into a. Eight, $10 million EBITDA business where they're a jack of all trades and they gotta get their hands dirty. Those are some common lessons. And then again, acquiring without integrating is a disaster. Waiting to happen. Yep.

Tim Hall: Why? They're not gonna work out. You're not gonna be on common systems. You're not gonna have a cohesive management team. And once you start having to put out multiple fires a week, month, day, whatever it is, you're not doing anything productive. [01:01:30] Yeah,

Kison Patel: that's right. I got leverage wisely and then fire fast.

Kison Patel: You the wrong people. Seats. Yeah.

Tim Hall: Hire really well and pay them above market so you get the best people. But when you've made a mistake, recognize 'em. Act on

Kison Patel: it. For an early entrepreneur, I've personally struggled with it, and that's a skill to learn, is to be objective and know where and how emotions is influencing your decision making so you can be objective.

Kison Patel: Is there anything that you've learned from a deal that may have went sideways or just maybe a surprises [01:02:00] that pop up during diligence or integration?

Tim Hall: To do deal, you almost need to fall in love with your own deal, which can be dangerous. You need to. Remain objective, have other people around you to remain objective.

Tim Hall: But if you go into something with any hair on the back of your neck that's standing up any sort of significant question, you don't feel like you've done your work. You've thoroughly answered every question and you feel a high degree of conviction, don't do it. Don't do it. That little thing probably is more real than you think.

Tim Hall: It'll come back and bite you. And as I said, just like with m and a, if I have the [01:02:30] chance of my current platform to do 3, 4, 5 deals at any one time and I get one wrong, it's gonna keep me from doing multiple other things that are value creating.

Kison Patel: I know what you're gonna save. I'm still gonna ask this. I find those deals, and I don't know if this is me being Indian or raised by immigrant parents, but there's, to me, there's a price on everything and I just, I get the hair raising on the back and I'm just like, all right, maybe I'm not gonna pay 20 for this.

Kison Patel: I'm only gonna pay 10, and if they're willing to get a deal at 10, I'll do this deal. I don't know. For some reason, I feel like,

Tim Hall: yeah, so I [01:03:00] will do deals with friends where I'm investing a little bit of my own personal money. Where I say, Hey, if this deal works out, I'm gonna make 10 times my money, but there's at least a 25 or 30 or 50% chance I might lose it all.

Tim Hall: But that's okay. 'cause that's a personal investment, doesn't cost me any time. There's, that's more of an expected value type of calculation. But when you can only do four or five things right? And one of those four or five things not only turns out to be a bad deal in itself, but keeps you spending all your time trying to fix that and not doing two things that are value added.

Tim Hall: That expected value equation is not [01:03:30] what you think. It's

Kison Patel: maybe I gotta rethink my investment thesis and focus more on like bargain hunting because, you know, I, I, I grew up learning to negotiate at garage sales when I was like 12, 13 years old. Mm-hmm. So maybe I got, so the thing I get stuck on a little bit, you push a little hard to get the good deal.

Kison Patel: Yeah. And then when you, when you look at the bad deal, you're almost like, nobody else wants this. There's often a reason things are a bargain and you will do those deals. Generally not. Yeah. See, that's where I knew you could.

Tim Hall: Look, if you told me I could buy a piece of real estate at a bargain, 'cause there was some unusual [01:04:00] dislocation and it was made of brick and it wasn't going anywhere, but you're buying a business full of people, people,

Kison Patel: this is the true underlying rule.

Kison Patel: I did this LinkedIn post about how to negotiate like a Patel, and it had all these things in the last one. It was like, but this doesn't apply with people. If I'm buying a TV from you, and we're,

Tim Hall: we're, we're backers of people. The businesses are all execution oriented, service oriented businesses where those people showing up with energy and care about their business and pride every day is what matters.

Tim Hall: So in a bargain business, people are probably unhappy and there's breaking that sentiment.

Kison Patel: Yeah. They're not gonna [01:04:30] have a positive sentiment and that's, it's gonna be really difficult. Uh, I learned that the hard way. I was, how old was I? 21. I was doing my first contract gig and I hired these painters and I, boy, I felt proud about how I negotiated like half of what they're asking.

Kison Patel: And the next day the job went to job site. It sure as hell showed. Right. Tim, this has been great. What's the craziest thing you've seen in m and a?

Tim Hall: One of the things that always amazes me is how quickly things can go from unrecognized to very hot. And I'll give you a couple of examples. I invested in a dermatology platform back in [01:05:00] 2016.

Tim Hall: There were a handful of platforms at the time, maybe six or seven. By the time we exited that business, there were 30 private equity backed platforms in the space. So wow. Platforms were then trading at higher prices, but we all were competing for the same acquisitions or many of the same acquisitions drove up prices of the platforms.

Tim Hall: So I've seen that in so many sectors. If you look at the home services business and you were to take heating, ventilation, and air conditioning, pest control, tree care, lawn care painting, there's [01:05:30] dozens of platforms in each of those spaces. We've like a lot of those spaces, but avoided them 'cause the platforms are very expensive than the add-ons will be more expensive.

Tim Hall: That is one of the things we really liked about the pool platform. It's quite large, about $18 billion in total. Very fragmented, very few consolidators, probably 5, 6, 7 right now in the country. Nobody in our geography at this point that we compete directly with. So we very much view this at the earliest innings of that consolidation and trying to find that entry point rather than coming in the seventh and eighth inning when everything's already [01:06:00] been bid up.

Tim Hall: So it always amazed me how quickly people will, will follow the herd, try to find a platform, but if you're the 30th person buying that platform, you're probably not getting the best one.

Kison Patel: It's gonna be tough. So that segment's gonna be competitive and it's gonna be tough to execute that thesis unless you got a total game changer maybe.

Kison Patel: What you're starting to see where they're doing this, like tech enable service and they're trying to reconsolidate an old industry. What's the most obscure industry you've ever heard of? A consolidation. I was even surprised. Pool installation. Got me. Yeah. Funeral homes. Yeah. Getting pretty obscure.

Tim Hall: Funeral homes [01:06:30] is one that's I I find to be very interesting.

Kison Patel: Oh, yeah. I did a diligence on a funeral home, years and years ago. A couple of 'em that have owned the real estate. Yeah, they make profit. Yeah. They hire a mortician and pay them pretty well. It's a pretty interesting business.

Tim Hall: It is an interesting business.

Tim Hall: It's been consolidating for well over 20 years. There's two large strategics out there that are public companies, but they own about 20% market share. The remaining 80% is either smaller, primarily private equity backed platforms, or just massively fragmented 27,000 people that own 1, [01:07:00] 2, 3, 4 homes in a region.

Tim Hall: But it's an interesting business. Our strategy is go after rural and secondary markets in Ohio and surrounding states. These companies tend to be fabric of the community. People have gone there for generations. They know people down at the post office, at the local coffee shop, the diner. So there's real kind of brand value and legacy.

Tim Hall: We keep the brands in place. In in those you own the companies real estate? We generally own the real estate, yes. So you get the benefit of the mortgage financing? Yeah. Huge. You, you can finance the real estate at very attractive prices. There are people that have done a [01:07:30] sale leaseback model in the funeral home space that is not one we like.

Tim Hall: They generally have pretty high operating leverage anyway, which is based on utilization or calls as they call it in the industry. So if you put that additional fixed rent of the sale leaseback into it, you've created a much more leverage operating environment before you've even put any debt on the company.

Tim Hall: So we have not wanted to do that sale leaseback model. It's also much more cumbersome to operate. Let's say you buy five people in a town or a geographic cluster. Most funeral homes aren't busy seven days a week. So there will be an opportunity to [01:08:00] improve the utilization of staff of vehicles, but at some point, if you have seven homes within a half hour drive, you might not need all seven.

Tim Hall: If you put them into a cell lease pack, you can't close one of 'em. Right. You can't take that out the sell lease pack.

Kison Patel: They're stuck. I've worked on a number of hospitality and I've done some gas station deals. It was really similar, but it's fascinating to have that real estate attached to it because the financing is so much more in your favor.

Kison Patel: Yeah. When you can have traditional and And the operating

Tim Hall: flexibility.

Kison Patel: Yes. Yeah. So the hard asset element is back in the picture now. Yeah.

Tim Hall: The business is one I've learned a lot about. I'd say [01:08:30] there's very unique customs, which have been fascinating to learn about based on the ethnicity or the religion of the people that are coming to the home for the service.

Tim Hall: So that's been very interesting to, to learn about as well.

Kison Patel: So interesting,

Tim Hall: fascinating thing about living here in this country of a $30 trillion economy and $330 million people. The great thing about my job is we get to learn about fascinating people and businesses every day and hopefully be able to take some of those experiences and apply them across our platforms.

Kison Patel: I learned a lot from this conversation. Tim, thank you for taking time from doing deals to have the conversation with me. [01:09:00]

Tim Hall: It's been a pleasure. Look, we've enjoyed the relationship and, and your platform's been great for us. We'll be rolling it out to the company we acquired today very soon.

Kison Patel: I love it.

Kison Patel: Those of you listening, fellow m and a scientists, we'd love to get feedback. This is the first interview I'd done with an independent sponsor. Want to hear what you thought of it? I know this is a topic that was actually suggested. Love to hear what questions I missed or could have asked. Gimme the criticism.

Kison Patel: What I could do to get better at this. If you have topic ideas as well, love to hear it. Till next time, here's to the deal.[01:09:30]

Kison Patel: Thank you for taking the time to explore the world of m and a with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcast. We'd love to hear from you. If you need help standing up an m and a function or optimizing one that you already have. We're here to help, and if we can't help you, we [01:10:00] probably know someone that can.

Kison Patel: You can reach out to me by email Kisan, 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 lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's ma science.com.

Kison Patel: Here's to the deal.[01:10:30]

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

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