Podcast: Part One of Selling to Private Equity, with Bobby Kingsbury

By Ryan Tansom
Published: May 3, 2018 | Last updated: April 15, 2024
Key Takeaways

Learn all about the private equity sales process from one of the industry’s experts, Bobby Kingsbury.


About the Host

Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called Growth and Exit Planning that helps in exit planning, value building and financial management.


About the Guest

Robert (Bobby) Kingsbury joined MCM in February 2008. His responsibilities include the execution of investment transactions and management of portfolio companies. Mr. Kingsbury is also responsible for the sourcing of investment opportunities, leading the partnership’s e-marketing strategy, website design and managing and developing Limited Partner relationships.

Prior to joining MCM, Mr. Kingsbury was drafted by the Pittsburgh Pirates in the 8th round of the 2002 Major League Baseball Draft. He spent six years playing professional baseball as an outfielder in the Pirates organization, participated in the 2004 Summer Olympic Games in Athens, Greece, and was a 2008 inductee into the Fordham University Athletic Hall of Fame. Mr. Kingsbury graduated from Fordham University with a Bachelor of Science degree in Finance.


If you listen, you will learn:

  • MCM Capital’s business history.
  • What Bobby and MCM look for when evaluating a client.
  • How MCM does business with their clients (where do they get the money?)?
  • Why private equity firms are necessary.
  • What MCM does for a small business.
  • What to ask a private equity firm before you begin due diligence.
  • How to build a relationship with potential clients.
  • How to provide value to a firm instead of just money.
  • How Bobby partners with the business owners.
  • What to expect when doing due diligence.
  • The benefit of getting a Quality of Earnings (QOE.)
  • How to create a win-win situation along with an equity firm.
  • Why an owner needs to be involved in the company.
  • Rep Warranty Insurance reduces risk.
  • What do things like customer and supplier concentration tell an equity firm about your business?
  • How Bobby helps a business owner move in a strategic direction.
  • What Bobby and MCM look for in a business team.
  • The importance of a CFO for your business.
  • Hiring is a form of investment in a company.
  • How to keep a business owner involved in the company.
  • When can a business owner walk away from the business?
  • Bobby’s parting thoughts.

Full Transcript

Announcer: Welcome to Life After Business, the podcast where your host, Ryan Tansom, brings you all the information you need to exit your company and explore what life can be like on the other side.

Ryan Tansom: Welcome back to the Life After Business podcast. This is episode 91. Have you ever wondered what it would look like if you looked at your business from the eyes of a buyer and why someone would actually want to buy your business and what process they would go through in order to value it and then actually determine whether it was a good investment for them or not? Well, that's exactly why I've got Bobby Kingsbury on the show today. He is a partner at MCM capital, which is a niche manufacturing private equity firm, and I've got Bobby on this show today for a couple reasons, even though he's already been on this show. We wanted to dive further into what is it that buyers are looking for? How do they make their investments? What are they doing through the due diligence? And looking at the financials, the team, the clients and our the actually valuing that and mitigating their risk so that way they can actually partner up and read the upside and I really think that hearing it from someone that you could potentially be sitting across the table from and hearing what it is that they're looking for will allow you to look at your business and the things that you're doing in light of making your business more sustainable and valuable because you're mitigating the risk for whatever buyer it is.


Ryan Tansom: And the other reason that I wanted to have Bobby on the show is because, as a private equity firm, I think a lot of really bad preconceived notions are out there about private equity firms and there is a lot of predators that are out there and there's certain people that are doing it right and I believe that bobby and his team are doing one heck of a job and they need to be highlighted for that. And I think hearing it from them and how they approach it, you'll be able to take away (after this episode) the questions that you should be asking as these private equity firms and family offices and investors are out there fishing, looking for investments, and you don't waste a bunch of time going down the road because you asked the right questions and the right things up front, knowing how you're validating, whether that's a potential opportunity you want to pursue or not.

Ryan Tansom: And just a little note, too, that this is episode one of a two part series because the next week we are going to have Bobby and Mark, which is the CEO of one of the companies that Bobby and his firm has purchased and invested in and you're going to be able to hear from the seller's perspective on how they went through the process and how a business seller can interact with a potential buyer and the things to look out for and whether bobby was completely full of crap in this episode or not. So I think this is an unbelievably valuable episode with all the takeaways you're going to have on how you should look at your business from the perspective of a business buyer. So without further ado, I really hope you enjoy part one of this two part series.


Announcer: This episode of Life After Business is brought to you by Solidity Financial's growth and exit planning. Their proven process gives you clarity on all of your exit options and how those options impact your financial success, timing and future happiness. Sell your company on your timeframe to the right buyer at the price you want.

Ryan Tansom: Good morning, Bobby. How you doing?

Bobby Kingsbury: I'm doing well, Ryan. How are you?

Ryan Tansom: Good. I'm excited to have you on the show again. Um, it's been a year and a half or something like that since, uh, you and I, were on the show, uh, chatting about your world and private equity and how things have been going. But the last 18 months has been pretty interesting for you. And, you know, the purpose of today is really diving into your, your experience as a buyer and looking at the companies that are out there within your niche and really being able to kind of peel back some layers for the owners so they can understand what you look like or what you're looking for when you're looking at these businesses as an investment, as a partnership and, and, uh, the future together. So maybe for the listeners, give a little bit of background of MCM capital again and then explain to us what niche that you're in and why you guys focused on that?

Bobby Kingsbury: Sure. Hey, happy to do it in first. You know, we don't have horns like all people think that private equity do. We are not the devil. Um, there's actually some great, there's some great private equity firms out there with a lot of good people and hopefully, you know, more business owners start to find those groups. But in any case, a MCM capital has been around for 26 years. For the last 26 years, we've had the same mantra. It is investing in niche manufacturers and value added distributors 15 to $75,000,000 in annual revenue and two to $8,000,000 of EBITDA and how we define niche and value added as we described manufacturers and distributors is through the gross margin profile of a business. You know businesses can run really lean and drive down costs, uh, especially in terms of SG&A, but you can't hide revenue over cost of goods sold. So furniture manufacturers, we look for businesses generating 35 percent plus gross margins and value added distribution, at least in our mind, is 25 percent plus gross margin.

Bobby Kingsbury: And for the last 25 or 26 years, we've been partnering with incumbent management teams. You know, we've done a hundred percent buyout- management buyout. But generally speaking, we, we focused on leveraged recapitalizations, which generally means the business owner sells the majority of his or her interest to MCM and they maintain operational control of the business. They continue to run the company, uh, moving forward. They're able to put some money in their pocket, mitigate some of their personal risk as well as provide equity. We provide equity to the broader management team to get everybody rowing in the same direction. So generally that's how we work with businesses for the last 26 years and how we will continue to do so moving forward

Ryan Tansom: So for our listeners and debunking some of the private equity, you know, notions that are out there and kind of like, even though you said you don't have horns and I, I think that there's such a wide spectrum and people don't realize it until they go down halfway through a journey with someone. They realized that they don't even have the money. And can you just maybe, Bobby, just show a couple of broad brush strokes on how many private equity firms are out there and you know, where do you get your money and how, what are some of the other models that are out there and… Because I believe that you guys are different and almost more towards the family office model than it is more towards some of the other people that don't even have their funds. So just maybe set a little bit of context for the listeners.

Bobby Kingsbury: You know, to put a number on private equity funds, Ryan, I couldn't even give that number. There's thousands. And you know, each private equity firm, but really they're segmented by, by size of their funds. And what I mean by that is the size of your fund, it really allows you to invest in a certain end of the market. So for us, currently we're a $75,000,000 fund and as a $75,000,000 fund, you know, we're, we're smaller than 85 percent of private equity funds, 75 percent of private equity funds. And we focus on the lower middle market. So if your fund is larger, you're focusing on larger businesses. If your fund is smaller, generally speaking, you're focused on, on smaller businesses. And our money generally comes from us. Uh, it comes from high net worth individuals, business owners who have exited their business, who believe in what we're doing and want outsize returns. It comes from institutions like a regional banks, and it also comes from endowments and state pensions. Generally speaking, the majority of our dollars come from the institutions and endowments, but the majority of our investors are the high net worth individuals, business owners who have exited their business and we like to have those folks invested in MCM because they're a great resource for us. Usually they've been through the process, that's how they've attained their net worth, and we can leverage their skill set or expertise as we look at evaluating different opportunities.

Ryan Tansom: Really following the money is an important thing, too. It's all about finding the motivation even for your investors, which then goes down to you, which goes down to why you buy these companies. So you know, explain, you know, when someone gives you a chunk of cash and whether it is an endowment or a bank or an investor, what are the terms and conditions and what are the, what are the conversations that you're having? Because then we'll flip the conversation going towards the, the, the buy side of what you're doing, but what are the things that they're expecting from you guys?

Bobby Kingsbury: Yes. So usually what they're expecting are outsize returns and the definition of outside returns certainly varies at any point in time, specifically for point in time today, outsize returns, uh, in, in private equity would be… I'm to be honest with you, probably 17 percent plus. Historically, private equity firms had been underwriting at at least 25 percent returns, but there's such a overflow of capital these days in the private equity market because everybody's looking for outsized returns. What you see in a lot of these state pension funds is that they're underfunded. Their liabilities certainly outweighed their assets. So they're trying to find outsize returns in the market place so they're flooding more dollars into a riskier asset class in private equity to try to get those returns to try to be made whole.

Ryan Tansom: Can I, can I- and I don't know if you've heard this story about incited a interject because I think it's a relevant for the listeners where I was reading this article about, um, Texas. And I don't know if it was Austin, Houston or Dallas can't remember which city it was, but they had run their pension numbers at… They could retire at 55. The underwriter… already laughing, right? Fifty five. They, uh, I think they had run their underwriters ran the numbers at like eight percent rate of return indefinitely. They, their mortality rate was like 70. So these people are literally living in retirement on the cashflow of the city for like 45 years at an eight percent rate of return. So they're literally going broke because they can't afford to pay on these people.

Bobby Kingsbury: That's exactly right. And you know, that actuarial data would've worked probably in 1930

Ryan Tansom: When everybody was dying at 45.

Bobby Kingsbury: But today it just doesn't make any sense. So you know that that's a problem that a lot of state funds, pension funds are faced. So they're flooding the equity markets, um, with, with dollars to try to drive outsize returns, which in turn from, from an ownership standpoint, at least right now, I would never tell a business owner to be a market timer because at the end of the day, this is a once in a lifetime opportunity for, for most. And you would like to exit or take some chips off the table when you're ready and not trying to market time. You know, to be honest with you, right now, businesses are trading for ridiculous values that isn't, that aren't sustainable. And you know, if, if you're a business owner and you know- for us, when we're focused on leveraged recapitalizations where the incumbent ownership stays in the business, continues to run it, and you might be very excited that a private equity firm or a strategic buyer or whomever is going to come in and offer you, you know, one or two turns more than really what your business is worth. You better hope that every bet that you make moving forward works, because the equity that you're going to have moving forward might not exist anymore. I look at it from my perspective, if I was a business owner, it would be really hard to turn down an extra five or six million dollars. OK. It would be really hard, but I would look at how people are structuring that transaction because you have to always look at the amount of leverage being used. And the amount of leverage being used could prohibit you from growing the business further and that equity that you had or retained is going to be worth nothing.

Bobby Kingsbury: So you, you, you know, you had, you had this deal up front where it was five or $6,000,000 more and they had you roll some, you know, that maybe that extra five or $6,000,000 back into the business and it's going to be worth nothing if the business has a hiccup or a bump in the road because then the bank's going to own your business. So I'd be very careful, you know, especially in this type of market when you're looking at financial structure and how people are structuring the transactions in terms of amount of leverage that they put on your balance sheet.

Ryan Tansom: Well, and this is why I'm excited for our conversation because I wanted, I want to dissect everything you were talking about because I think it will every, there's so many business owners right now that are getting knocked on the door and uh, my partner called it fishing. A lot of these people are fishing because they're trying to deploy their, their money. So that's why I started at the motivation because it's, they're overpaying is because they're trying to pay for their obligations, depending on where the money comes from. And I think that's what's unique about you guys is you know, you're not necessarily promising the returns that these other people are promising because you can get money from these people easily because they're suffering as well. But how that impacts your ability to run your business going forward because of how much money you got, how much leverage you have. There's a lot of false assumptions that are placed on this that might not work.

Bobby Kingsbury: I will tell you that they, that we are promising those returns and actually we had to, we have delivered on those returns. But what would I would tell you is, is how we're different is that our pace of deployment of capital isn't the same as everybody else's because we're very patient, value-oriented investors. We look for the right businesses and the right people. Now given your LP base, that's, that's your limited partners – people who are giving you money – depending on who they are, whether they're fund to funds or um, which are large organizations that look to invest, take people's money as a whole and then invest in 10 or 15 other private equity firms who a diversifies your portfolio risk. Those types of investors are looking for pace of capital deployed. So when we sign up with our LPS, we have five years to invest the money that we're given. The fund itself is 10 years. So by the time we buy businesses, generally speaking, you know, in the first five years we should be… have all of them exited in 10 years now. That always doesn't work, right? Our average hold period is six and a half years. Um, so we hold businesses a little longer than most, but we're also investing in lower middle market businesses or investing in great companies. But most of the time, when you're a small business, you have one or two flat sides. And what we try to do is round out those flat sides. And with smaller companies, it just takes a little longer because we're investing for the future. And then some of the return suffer from other private equity firms because they have so much money that they have to deploy sitting on the sidelines and now they're, you know, maybe they're in year five of their fund.

Bobby Kingsbury: And I, if I was a business owner, I would always ask, where are you in your fund? Because at certain times, private equity funds feel so much pressure if their money isn't deployed, is not used and your investor base isn't happy because now I allocated, you know, $20,000,000 to MCM and they only deployed 15 of it. I have $5,000,000 allocated to them that could have been earning money elsewhere. So some private equity firms feel that pressure and they will overpay for a business to deploy that capital. So I would, if I was a business owner, I would always ask where the private equity firm is in the life cycle of their fund.

Ryan Tansom: I think it's so important because the questions that you are just arising is most owners don't know to ask these questions because it's all about the motivations. You just follow the thread to figure out where the behaviors to come from, which kind of trickles into the next part of the conversation, which is, you know, the ongoing partnership and you know, that's where you hear a lot of these horror stories because the, they over promised they overpaid and then they've got to squeeze blood out of a turnip and it's you and your company and your culture and everything. So I think it's extremely important. So let's maybe shift into when you're, when private equity firms and you guys are out there looking for businesses, how are you finding them? And then let's just walk through the whole process because, you know,starting from, you know, talking to them, you know, you're looking for two to 8,000,000 EBITDA. So how do you start the conversation and then let's just kind of walk through the, the, the typical journey.

Bobby Kingsbury: Sure. Uh, historically 75 percent of our deals are done outside of the investment banking process and we're, we're able to do that because we focus more on relationships than anything else. It's very tough to develop a true relationship and understand who that business owner is and vice versa as a business owner who your potential partner is going to be in a call it 90 day due diligence period and you meet them once during a management presentation and you're supposed to evaluate… you know what it would be like? It'd be like going on- online dating, going on one date and then deciding to marry that person. But sometimes that happens, right? Love at first sight, that may happen. 99 percent of the time it doesn't. So what we like to do is start to talk to businesses really before they get to that threshold for us. You know, when, when their $5,000,000, $10,000,000, when they're 15, you know, when we can start to develop a true relationship and without any expectations from either side, because both of us know that from the business owner's standpoint that they're not upsized yet for MCM to invest in it.

Bobby Kingsbury: From our standpoint, the business owner isn't ready to do anything yet. So it's great to develop a relationship and have casual conversations without an expectation that a deal needs to get done. So over a long period of time – three, four, five years – we develop relationships with business owners and they, they see how we act, how we are as people; culturally, do our interests align? And then it starts to make sense. Now, don't get me wrong. Value has to be there and we're not trying to steal any companies. What we're trying to do is develop relationships so both sides don't make mistakes. And in 26 years we've never lost money in any leveraged buy out we've ever done. And it's not because we're the smartest guys in the world, it's because of the, you know, we're very focused on the businesses that we'd like to invest in where we can actually add value. If we're only providing capital to the table, that's a commodity. I just told you how many private equity firms are out there. If we're only providing money to the table, we are not going to drive outsize returns and shareholder value for the incumbent business owner, their management team. And then we always put an incentive comp plan for the entire employee base all the way down to the shop floor. Now they're not equity owners, but once you start to hit certain numbers, they're going to benefit from it, too. We just spend a lot of time directly sourcing transactions. Now. We do have a lot of relationships with investment banks. We have to. Because if you think about the life cycle of our relationship period, three to five years with business owners, and we only have five years to invest that money. You know, we have to look at businesses from intermediaries or from investment banks. But, but generally speaking, you know, I'll be honest with you, we're- 99 percent of the time, we're not going to be the highest bidder.

Bobby Kingsbury: What we're going to do is really be a partner for the business owner in that equity that that business owner has, we're going to make damn well sure that that is worth something. You know, we will do whatever we can to work on a business that to continue to grow shareholder value and not squeeze it, like you said, trying to squeeze blood out of a turnip. We try to do is we grow the business organically. We forecast on remodeling a company. We forecast degradation to earnings in the first year specifically because most of the time, you know, the executive management team isn't fully there. So we invest in resources from an HR standpoint. We invest in machines or capex. We invest in sales and marketing and we know that that business was possibly… not starved, but you know, it didn't have all the resources that they needed prior to our involvement.

Ryan Tansom: This is exactly why I wanted to dive in with you on this, this, on this interview because it's not just about the turn and burn for the numbers because that only goes so far. When when the, the, the business owners that are listening to this, you're diving in to really see true value within the business which I think really sheds light on your due diligence process and really building a company to sell. And where are the places that business owners are focusing on? Is it the right places and where is this quote unquote value that you see and how do you actually like go in and do this stuff? Because I, I, I do believe that a lot of business owners they're either starved financially because their banking relationship is terrible or they're starved because they don't have the right people, the right processes or the wrong connections in their supply chain, all these different things, right? Which it's about gluing them all together, layering the finances but then also the people in the partnership. So let's go and Bobby like, you know, instead of just, you know, like turn and burn and deploying the capital in 90 days like a lot of these other people who are doing, you know, like explain the due diligence process and what are people doing that they could be doing better? And how do you employ, you know, let's just start with the due diligence process. You know, when you find someone with, you know, 2,000,000 in EBITDA going through… what are the things that you're looking for that they're doing well and then not doing well. And then how do you marry up what you guys do well with them?

Bobby Kingsbury: Um, so you know, we do probably standard business diligence. That's usually it's going to take 60 to 75 days and if you're a business owner listening, uh, don't underestimate this process. It is going to take you away from your business. Uh, we are very cognizant to try to be as least disruptive as we can to the business. But, you know, in, in the second part of the series uh, you can hear from, from one of our CEOs that we partnered with and he can give you really the, the, the down and dirty of what the diligence process was like. And how it was from, yeah, from, from our perspective, but you know, it's, it's business due diligence where we really try to understand a company's competitive advantage, a reason why they exist and why are they going to exist moving forward? How are we going to grow this business together over the next five to six years?

Bobby Kingsbury: It's getting an understanding of, of their people. You know, when, when we talk with the business owner, you know, what, what would you like to have? If you had endless resources, what people would you have? Do you, do you believe today that you have the right people in the right seats on the bus that are going to get you from point a to point b? If not, how do we add those resources? What do you need from a financial standpoint? Uh, you know, we do a uh, uh, a quality of earnings, you know, that's uh we hire a, an accounting firm to come in and do some forensic accounting, look under the hood and make sure, you know, as a numbers were represented to us that they are what they are. Um, obviously if not, we have to answer to our shareholders. And what we want to do is pay a fair value for a business, but if the numbers aren't there then obviously, you know, things might have to happen. And for the business owners that are on this call, what's becoming more commonplace today and us personally, we like it. Now the business owners will have to spend some money, but they will get a quality of earnings report done prior to somebody getting involved. And the reason that we like it, you know, is we're always very honest with our valuations with companies. Some other firms are not as as honest as… it's not all of them. Generally speaking, private equity firms, you know, backup what they say. But there's gonna be some, they're going to go in there and tell you your company's worth x and really during this diligence process, hammer you on different things to say your business isn't worth x, it's worth y. Now if you get a quality of earnings done prior to getting involved, that eliminates any of the… possibly eliminates any of the things that they could possibly find to start to hammer you on, on price. So it's becoming more commonplace now for some folks who get quality of earnings reports done first and if you want to spend the, I think it's around $50,000 to do it and really ensure that that group, that partner that you're partnering with, um, is not going to, to retrade, I would suggest doing it. Um, we also do…

Ryan Tansom: I want to take a couple of these in chunks because, Bobby, I think a lot of people don't understand how important this is when you're going in there, whether it's you as a buyer or anybody, it is, you know, and I think the financials is a good place to start because it's the foundation and you know, explain, because… I mean shit man, we didn't know our numbers, you know, the first time like, you know, you're just kind of… we were just running and gunning and selling and going in like, and, and when I say knowing the numbers, maybe let's, let's take a layer back. So let's see you do the quality of earnings, but like you know, how clean someone's finances are and what does that even mean is it, you know, really having the PNL and the balance sheet and everything where they actually know what it is that's happening in their business. And I think I had someone on the show and they said financials are the business- are the language of business. So you start, you know, you're starting to hear. So we explain, you know, what are the things that you're looking for? And then how do you, you know, how do you emotionally or like I, because I know you're probably thinking about when you're sitting across from someone, someone that knows their numbers versus someone that does it and how that impacts your interaction with them?

Bobby Kingsbury: Yeah. So it's interesting. Maybe I'm too nice of a guy, but uh, there was just an example a few weeks ago, we were looking at a business that would be an add-on acquisition for one of our portfolio companies and the business was generating $7,000,000 in revenue and about, you know, if, when he sent me his financials, roughly a $180,000 of EBITDA with 35 percent plus gross margin. So for me it didn't make sense. Uh, so I, I told the gentleman, I said, I'm, I'm assuming you're running this business as a lifestyle business. So there's a lot of things, you know, car payments, a country club dues, you know, a lot of things that are running through your business that shouldn't be, moving forward. And he said, yes, you're, you're right. I said, OK, so here's, here's what you're going to do. I want you to pretend like you sold your business to MCM tomorrow and we were the owners of the business and you're, you are no longer able to provide these, these lifestyle benefits.

Bobby Kingsbury: I want you to write all those down and I want you to give me a value associated with them. And then what what I'm going to do is I'm going to add that back to EBITDA. And the reason that's important to you is because that's how I value your business. If I value your business, you know, say it's five times EBITDA of roughly 200,000 of EBITDA, your business is worth a million dollars. Now, if you bring these add backs together and now it's 500,000 of EBITDA, now your business is worth two and a half million. So I just want you to…

Bobby Kingsbury: But it, you know, so in, in my mind. And when I told him and what's, what's interesting is you said, you know, Bobby, throughout this whole process, I've never felt like you were full of shit. I never said one time during this process that you were full of shit. And you know, to me that's a compliment, right? Um, but I, I, you know what, uh, what would I tell them is this, is, this is a once… I said, you have a wife, you have children. I can appreciate that. This is a once-in-a-lifetime opportunity for you and I want you to maximize the value of your business because I wouldn't feel good if, if you're going to continue and you're going to be a large part of our organization going forward, large part of our portfolio companies, I don't want you to come into the office pissed off every day. Saying, you know, I got screwed. MCM should've given me this. They should have given me that you. I don't want to do that. It's, it's, you know, life's too short. What we want to do is create win-win situations for everybody. And if we can't do it, then we can't do it. You know, if, if I got to him and it, and ultimately what, what happened just the other day is, you know, he, he said, Bobby, I, I just can't do it. He said, you know, I'm, I'm, I'm in my mid-forties right now, you know. I, I think what you gave me as a fair value for my, my business. The problem is, is my business just isn't large enough yet for me to feel comfortable, you know, that, uh, I got a couple of kids going to college soon and you know, if, um, if, if things were to go to hell in a handbasket or, you know, I, I were to get fired… and I told him, I said, I, I can't promise you the moon.

Bobby Kingsbury: I, I said, you know, can I promise you that you're going to have a job for the next five to 10 years? The answer is no, Matt, you know. So what's, what's going to happen is we're going to sign a two or three year employment agreement and that's all that I can get, can guarantee you things. Things may change, but at the end of the day, it's not my decision whether or not you stay, it's the CEO's decision. And if you continue to perform like you have been, there is no reason that you shouldn't be there moving forward. But you know, it's just conversations like that. And again, it's developing a relationship. Now, you know, a few years down the road when his business continues to grow and then he's, he's ready, he's more comfortable. Then I think it's an opportunity. So we have what we're going to keep an ongoing dialogue and see what happens from there.

Ryan Tansom: It takes time to build the relationships and as you guys are going back and forth, there's a lot of this trust factor that's getting built and I think, you know, whether in the due diligence process, it's the financials and all the things that you're looking for to, to be able to see, does it reflect the individual that's sitting across from me. So how would that be different for someone that comes in with their financials all muddied all over and not only just add backs and all these different things, but you know, knowing literally where things are at or not. So a lot of a lower market companies, you know, they- the owner might have that or the CFO that's just sharp. So would you pay more or tell me how that experience is like when you have, you know, through the due diligence and the financials, where you're asking questions about cost of goods sold or the different things is you're looking for the narrative, the financial, someone that totally has everything locked in and can at least answer your questions versus someone that can't. How does that impact the situation from trust and the value that they are willing to pay?

Bobby Kingsbury: Well, I, I would say it definitely impacts it heavily at the end of the day. When we're talking to a business owner that knows the ins and outs of their business, you know, to your point, the financials are language of, of business. And if a business owner understands what aspects of their business affects, you know, the, the, the growth margin line, what affects the EBITDA margin line. From an inventory standpoint, inventory turns, you know, days of, uh, of AR outstanding, days of payables outstanding, you know, how those interact, you know, with the business in terms of cash flow, you know, where the company needs to, needs to be, if they want to invest in a certain piece of equipment, can, can they handle that forecasting? You know, it, it provides a lot more trust with us moving forward that one, you know, the business owner understands the numbers, understands, you know, what they can do to affect the numbers and what we're confident, more confident in the value that we can offer to a business owner versus somebody who really doesn't know the financials, you know, they have, you know, uh, their financials haven't been audited, you know, they haven't even been reviewed.

Bobby Kingsbury: Uh, they're, they're running quickbooks. There's the, there's a lot of things that we see from and, you know, they don't have a controller and certainly not a CFO, much less controller. They have a bookkeeper that's maybe not even a CPA, you know, doing the, the, their numbers. We have to really understand the veracity of their numbers and are they true? Uh, so for, for us it's, it's not, it's not that we don't trust the business owner, uh, because they can be a great person, trustworthy, but it's, it's not trusting the numbers that are presented to us. And I think we would certainly be more comfortable and, I don't know if we would necessarily pay more, but we'd be more firm on our number.

Ryan Tansom: Well, and I think, and I want to make sure we go back to the due diligence and other parts of it, um, from contracts and client concentration and technology and equipment and stuff like that. Let's make sure we go back to that. But I think it's a perfect example on so if, if someone's got their stuff together and knows everything, you know, yes, so the dollar amount might be the same, but can you explain, Bobby, how you mitigate risk as certain uncertainties pop up? You know, so how does that affect the deal structure and the payments? So, you know, if everybody's, let's say you got the two ends of the spectrum, a hundred percent cash down versus all earn-outs I mean like in the, I know there's a lot of different creative ways that you can structure things in-between, but how do you mitigate your risks through deal structured payments situations as you start to see things that are red flags like that?

Bobby Kingsbury: Yeah. Well, you know, there's, there's, there's certainly different ways to do it. You know, the easiest way and what's becoming more commonplace now, similar to business owners getting a QoE done prior to having a private equity firm or a group look at at their particular business is getting a rep and warranty insurance. Um, so all the representations and warranties that a business owner is assigning, you know, to, to the private equity group or backing, you know, on all the representations he or she is making are now being able to be covered by insurance. You know, you can get a $5,000,000 rep and warranty insurance or around $200-$250,000 and most of the time both the private equity group and the business owners split the cost. So from um, a liability standpoint from a business owner, you know, as long as things, things are disclosed, and knowledge qualifiers are in there, to my knowledge, I, you know, we haven't had any of A, B and C.

Ryan Tansom: So like you're talking like environmental, legal, like what, what are the things that they might be describing?

Bobby Kingsbury: All of it. To my knowledge, there have been no environmental issues at this property. In reps and warranties insurance, you know, wil certainly cover that. So from a, from an indemnification standpoint, purchase price, you know, usually some of it's held back or indemnification claims for, you know, 12 to 18 months, you know, with rep and warranty insurance, you know, that million dollars, you know, a million-and-a-half doesn't have to be put into the indemnification escrow because it's being covered by the rep and warranty insurance. So now that business owner will get more cash up front and not have to worry about whether or not there's, there's going to be a claim or they're going to not get it moving forward. Does that make sense?

Ryan Tansom: No, totally, totally. And I think it's a great piece of advice and I'm just… There's so many different ways we can go with the deal structures, but it, and I think the big takeaway is like and these are like as you filter down in the year, you're looking at perfect partnerships, right? So let's maybe go a layer above of, as you're looking at people and you're going, "not a fit." Because I mean, I know that there's, there's a lot of different good qualities of the ideal partnership and how you're willing to work to make the deal perfect for them. But as you're, as you're, you know, de-selecting people you know, and you're getting in that due diligence process or in the, you know, the primary phase like that, the red flags and stuff like that. What are the things that you're so there yet all the financials. Um, but as you're doing some of the due diligence in whether it's contracts or technology or, you know, the employment or the key managers. Explain what you're looking for and what are the big red flags that will literally make you de-select them because it's not even worth paying for.

Bobby Kingsbury: Yeah. Uh, you know, what we try to do is a lot of diligence up front before we put together an offer. But obviously you find things afterwards in terms of business diligence, you know, when we're looking at customers and usually I ask for the top 20 customers by revenue over the last five years, because we look for customer concentration. The value that we pay for a business is always a function of risk. It's always risk/return. So from a customer concentration standpoint, what you'll see is, is maybe there's a large fortune 500 company, OK, and they have, call it a 25 locations. Now when that business owner sent me their customers and you know usually beforehand we're not disclosing names, um, or, or maybe they're named differently in their, in their CRM system, you know, that I would go through the customer list and now I'd see, OK, now there's, you know, 20 locations from GE for example.

Bobby Kingsbury: Now the business owner looked at each one of those locations as a different customer. But from our standpoint, GE is one customer and the risk profile that of the business changes now where he didn't have a customer that was larger than nine percent of revenue. Now when I add up all the GE folks and all their locations, maybe that is now 50 percent of their revenue. And while they are different locations and you know, most of the time from a corporate standpoint, you know, it's going to be a corporate buying program. So that may change above the locations where they're saying we're going to use a different supplier, here's who you're going to use. And now all of a sudden 50 percent of that revenue that we had for that business is gone. So when we see a certain things like that, when we see the same thing with supplier concentration, you know, those, it would be very similar to, to that. Obviously increased… the more supplier concentration you have, the larger the risk profile is for us in, in the business. So we wouldn't move forward or you know, we would just say we do want to move forward, but because this concentration, you know, this is what the price is going to be. Now the business owner has to really decide if they would like to move forward.

Ryan Tansom: That's really applicable and a lot of people have these issues with the large customer concentration or like, I mean we were a Cannon and a LexMark – I mean we were a distributor, so we had, you know, they were diversifying through managed it services and such. But like, I mean they got us by the balls, you know what I mean? And it's like OK, what happens, what happens to the change of licensing? Or they, you know, at one point I think when we first started they had geographical exclusivity and then they just said, well, no, not that anymore. So then the next thing, you've got seven people competing with you, but so even though that might be the scenario for a business owner, like if, how, if, if you and I were sitting across the table from each other and in your hammer me like this and that's fine, but I agree with you and I see that. What if I were to say, well GE that is a scenario but I have actually gone in and my team has landed a contract that has all the recorse for GE and so that might be, you know, 40 percent of my revenue but they cannot cancel that contract and we've got certain minimum volumes that they are guaranteeing me over the next five years? Or the same thing with the supplier. Is there, you know, cause I'm mitigating the risk for me. And for you is… Or how did, how do you view something like that?

Bobby Kingsbury: Very interesting question, Ryan. And I will tell you if they're guaranteeing you volumes and it's a take or pay, I would say that mitigates the risk a lot. What you see is you know, long, you know, for example, in aerospace, Boeing's a customer, you know, if you have a long-term agreement in aerospace, they're… in aerospace there aren't a lot of customers, so you may have customer concentration of businesses like that, you know, where Boeing or Airbus may be 30 or 40 percent of your revenue, ultimately. Now there's long-term contracts in place. It's not take, take or pay, but our, our largest concern is not, not the contract and that exclusivity because that, that's great. It certainly helps. But now Ryan, tell me what if, you know, you, you, you are 40 percent supplier to Boeing and you know, you're, you're, you're doing everything, you're, you're qualified, you're on their A supplier list and now Boeing has several incidents in their plants and a few employees, you know, had happened to die or some planes crash, you know, and now Boeing is no longer manufacturing airplanes. They're on hold for the next 12 months to figure stuff out. What happens to your business?

Ryan Tansom: Right, right. Or Elon Musk actually invents the hyperloop and no one rides any plans.

Bobby Kingsbury: Yeah, right. Yeah. Or, or, or you're invested in Tesla and now they can't produce cars, you know, they're, they're, they're way behind the curve and now they're running overtime. So from, from our standpoint, if you have customer concentration, regardless, take or pay is different because basically you're guaranteeing me volumes if you're guaranteeing the volumes, you know, it's, it's a little different, but still, you know, you look at the mining and oil and gas industry, you can guarantee the volumes then you're going to go out of business and I'm stuck holding that.

Ryan Tansom: Even if you got the guaranteed payments, you know, if they go into bankruptcy or they filed chapter 11 or something, I mean you are not highest on the debt list. I mean there's people way ahead of you.

Bobby Kingsbury: The problem is with customer concentration is that if you know your customer catches a cold, you're going to catch the flu or pneumonia. And that's a problem.

Ryan Tansom: And that's, that's a, that's amazing. I, yeah, cause everything trickles downhill from that. And I think suppliers is a big… you know, I was actually meeting with a customer, um, Bobby and that, and this all comes up and it's so amazing how entrepreneurs don't look at their business like, like an investment vehicle like this. Because we were sitting there talking, we're doing preliminary due diligence and we're saying, you know, so you've got a handful of suppliers and they're betting the horse on all these really cool innovations that they're doing for the future. And I said, well, you know, there's risk and if you're riding these suppliers as your main horse, what happens if something happens to them? And then are you warrantying the product or are they? And there was kind of like a head tilt because what happens, who is holding the warranty? I mean, because…

Bobby Kingsbury: It's interesting. Going back to when, when you were talking about structuring and I, I got into to rep and warranty insurance, you know, then there's the, the, there's these other, other times, you know, when you look at an earnout or a seller note, a seller note is really just, you know, the guaranteed payment. But it's not upfront. It's, you know, 12 or 24 months down the road, but, but most of the time you know, how you're bridging some valuation gap is it's an earn out. So a business owner is going to tell me, yeah, my, my business is worth x today, but you know, uh, we're scheduled to get a $8,000,000 contract next year. That's gonna, you know, annual revenue for the next five years, guaranteed. OK, how confident are you in it? Um, I'm, I'm 99 percent sure that, that we're going to get it OK, if you're 99 percent sure, then I'm going to give you an extra $5,000,000 in terms of value over the next three years if you hit x, y, and z numbers based on this customer. And then you really understand what, whether or not they truly believe in it or not.

Bobby Kingsbury: Now going into earnouts, I don't like earnouts, but particularly because, you know, we, we do leverage recapitalizations. We're partnering with incumbent ownership. I don't want that CEO to manage the business to hitting his or her earnout. What, what, what I would rather do is OK, if you tell me that, that this is going, going to happen, how about if we, you know, hit overall numbers of the business. So I don't care whether or not we, we, we get this or not, but if we do, we're going to hit these overall numbers and then what I would like to do is I'm going to let you buy that 10 percent of the business for $10,000. So I'm going to give you a claw back. So if we hit this, how now you get 10 percent more of the upside of the business moving forward because it, you know, earnouts are all convoluted. It's, it's fudging different numbers. What goes here, what goes there. Is it the business owner, if the earnouts based on revenue, is it the law of unintended consequences where now you know, they're taking lower margin business in just to hit these revenue numbers. I don't want that. I want everybody's, you know, motivation the same, rolling in the same direction. So I would rather have, you know, overall goals of revenue and EBITDA. And then if you hit these, you know, over a certain timeframe, you're going to earn 10 percent of the company again.

Ryan Tansom: Well I think is really interesting is it you're starting to like, hopefully the listeners are starting to realize that it's all about negotiation and people both realizing that it's all about risk going forward and the truth and the numbers and the forecasting and the strategy and you know, the opposite side, which, you know, you were saying like you don't want the business owner managing to the earnouts and do a decreasing margins because it's revenue based. So it's funny because the, the, I would say that as a seller you want it to be revenue based unless you've got to create a structure like you just described because a lot of the times, you know, these earned it to be a margin-based on whether it's, you know, profit center or event or something. But guess what, the moment they sell to someone like you, they're not in control of the EBITDA anymore or the profit. So by you know, you're looking to hit your quarterly bonus. And by the way, I think we're going to buy a semi today and all of a sudden you don't get your 500 grand.

Bobby Kingsbury: Yeah. And, and, and that may be true, but you know, for we let our entrepreneurs run the business, so we don't dictate. What we do is provide strategic direction. Now if we have a capex budget approved for 2018, if you want to go buy a semi, you know, and it's outside of this capex budget, you just come to the board for approval and you just have a business case as to why we want to do it. But it, you know, the, the, so the reason we put metrics in place if we have something like that is because, you know, we're not there day to day, we're not running the business. We want the business owner to really manage the business for long-term growth, not for it to be so short sighted for short-term gains in terms of, uh, an, an earnout.

Ryan Tansom: I think it's a huge point and I think that's also one of the things that's different between you guys and a lot of the people that are deploying capital extremely fast and trying to flip companies. Um, and I think, well, you know, because I want to come back to life after which I know, um, the, the second round of this series will be with Mark and you, and we'll get a really good peer into it, but I want, so I want to come back to that, but let's talk about your perceptions. So we've gone through the client concentration, some of the kind of the inner operational stuff in the finances, but now let's switch to the team and the, the employees and the executive team because you've mentioned that you are partnering with teams, not necessarily… I mean, because it's high value for everybody. So when you're doing the due diligence or you're doing it like you're assessing a company, what are the things that you're looking for and what is the best case scenario and what is the, the, the things that you see a lot of people doing wrong as far as it comes to key employees and personnel?

Bobby Kingsbury: Yeah. Um, you know, given the fact that we work with smaller companies, generally speaking, what we see is the executive management team is the business owner. It's he or she filling all the different positions you know, and you laugh, but it's, but, but it's true to the extent that they have someone is either a VP of sales and marketing or a COO. What we've seen historically is business owners generally under hire in the controller CFO position They look at it more as a cost, whereas operations are going to drive revenue. Sales and marketing are going to drive revenue. And uh, the controller or CFO is just a cost that I have to have. What they don't realize is how important that business is, given that the financial statements are the language of business where a strong controller or CFO comes to the business owner and say, you know, if we do a, b, or c, you know, I, I, I'm looking at the numbers, we're looking at, you know, moving forward or for the next year.

Bobby Kingsbury: Um, you know, we can buy this piece of equipment and accelerate depreciation which would help our cash flow, um, you know, moving forward or if we're, you know, if, if we can make some adjustments through operations or sales and marketing, and through it we can drop this down to the bottom line. Um, so we've, we've seen that when we're going through our, our diligence, what we like to do is, is really spend some time with people we would like to see tenure. We'd like to see how they interact together culturally, you know. How, how has the organization, are everyone's interests aligned. Um, are people looking out for the best interest of the business or are they looking out for themselves? We don't want "I" people; we want team, we want, we. And we use a tool called the predictive index um, that really helps evaluate whether a person is not necessarily the right person, but are they the right fit for the position they in the right seat on the bus. So a business owner would answer some questions, you know, for your particular business. Why we did this with Mark and his team, and he can touch on it further if you want, but we had Mark fill out the survey questions, what does a successful vp of sales and marketing look like for your organization? And then that spits out a certain pattern. So now when we go to evaluate either somebody that we have to hire or somebody that's in that current position, do they fit that specific pattern? And then the business owner has to decide either no they don't and this is what we're going to do to, um, to, to try and get them there.

Bobby Kingsbury: And usually that's not the best course of action or you know, that person doesn't fit, but this is exactly where they fit and this is where they'd be the most happy. So the, the, you know, the predictive index, really it's about needs and behaviors. So it's really understanding an individual's needs and, and their needs are going to drive their behaviors and then in turn their success or failure in a particular role in a business. So it will use that to really look at overall at edit team, the team dynamics, because you, you always want to have some different personalities in different functions and that way they work better holistically as an organization.

Ryan Tansom: Well, I think you hit on a lot of really good points there and the going back to your CFO controller point, you know, we specifically, we went through like four. My dad was like, "Oh, let's just hire the $18,000 person that is, you know, still in college" you know like random forums and we got 100 employees. And so there's this, I think there's this. So with the CFO controller perspective, you know, you had mentioned, you talked about forecasting, it's really strategy, right? So whether you've got, you know, an accounting manager or controller who's historically just filling in data and like, you know, logging what's happened before, you know? I mean, correct me if I'm wrong here, but you're looking for strategic or someone that's got the strategically thinking forward thinking, giving strategies on the cashflow, the uh, the, the sales, the operations, everything, right? I mean, it's way different than just an actual, you know, bookkeeper.

Bobby Kingsbury: Yeah, a CFO, and sometimes you'll find this in a controller, but you know, more of a CFO is strategic in their thinking. The others are tactical, you know, it's, it's giving the CEO numbers, here's, here's the monthly report, here's the quarterly report. Whereas the CFO is going to the CEO of the organization and really being more strategic about their thought process when looking at, at the numbers.

Ryan Tansom: Well, and I think the biggest, and it's the whole executive team, uh, there's this, uh, an, a in this might lend some, um, some insight on your guys' process and the value you guys bring or a partnership for an entrepreneur down the road. But there's this whole mental hurdle that I've watched us go through and I, I watch a lot of our clients go through where, OK, this is great. You know, essentially getting outside of the lifestyle business, you know, you're doing, you get to that 500,000,000 in EBITDA and you're trying to get to the two, three, four. You know, you hire three to four people that all of a sudden are pulling down a buck 50, maybe 200 grand on bonuses to it and all of a sudden it's literally coming out of your boat budget or your cabin budget or you know, all these things are their investments. So it's an immediate investment or it's, it's hitting the cashflow, but explain, you know, for the business owners who are on that kind of brink, how the short-term expense or investment in the cashflow will impact the value or the multiple that they would potentially get an order and or in-between there, too.

Bobby Kingsbury: Yeah. You know, so from, from our perspective, when we look at a business, so I'm, I'm looking at one right now that uh, the, the business really doesn't have a, you know, to our point, doesn't have a CFO or controller, you know, they have a bookkeeper now. It's hot. It's a very profitable business. It's smaller in revenue that we typically like at $6,000,000 in revenue, but two and a half of EBITDA and they don't have a controller or CFO. So we need somebody in, in that role, if we're going to grow the business and look strategically. So what we're going to do is, you know, when when I proffer and offer to the owner, I'm not basing it off of 2.5 of EBITDA, I'm basing off the 2.35 because I'm adding back that that person that should be in the business moving forward now that they've gotten away with it, you know, for the, you know, the, the life of their company, but moving forward in order to grow, that's a position that is needed.

Bobby Kingsbury: So if somebody's hiring, you know, in, in, in front ahead of the curve, when they're ready, they're, there's going to be no reductions for EBITDA. I would encourage business owners not to manage a business to a PNL and be so numbers-driven, you know, where it, it's going to affect their boat, you know, because it, it, it may, it may affect your, your, your boat payment today, but it's going to afford you a house in Vail or a house down in Florida, you know, uh, moving forward because now you know, you're associating a multiple to it. So you're looking at that $150,000 today, but associate a five times multiple to it…

Ryan Tansom: $750,000.

Bobby Kingsbury: Yup, you got it. You know. So that's, that's what it is to a business owner. So I would say don't be penny-wise and pound foolish, you know, but it's, it's also calculated growth, you know, as a, as you're growing your business, you know, sometimes in the smaller businesses you don't need those $150,000 people, you know, but, but, but have somebody in place that could either you can grow and mentor and really get to that talent level of the $150,000 person or you know, wait, wait until your, your company is to absorb, um, that I would tell you at two and a half million dollars of EBITDA, I think you can really absorb a controller and you should have one, right? Yeah. You know, if you're at $500,000 in EBITDA, I get it. You know, bookkeeper. But then as your organization get continues to grow, don't let your organisation outgrow your people because you're going to suffer later on.

Ryan Tansom: So that kind of brings into your model as it. Lets turn a switch and move along to the integration and how you fill those gaps. Right? Because I think this is why it's so important to understand for these entrepreneurs that are sitting across from a private equity firm or a potential buyer, what value are they going to bring? Like you said, there's a lot of money out there and there's a lot of really dumb money where there's no, there's no value other than the capital versus someone that's going to strategically fill gaps. So as you've gone through this due diligence process and you've kind of assessed where the holes are in the ship, you know, how do you then… what is the owner's mindset? How important is that? And then as you start to fill these gaps, how do you interact and what's the integration look like as you continue to move forward?

Bobby Kingsbury: Yeah. So, um, I would say it varies depending on the company's need needs, but we're not dictatorial what we do from a board perspective, uh, it provides strategic direction. You know, we look at five to 600 businesses a year. We invest in one or two. So we're very, very selective in the businesses that we look at. We're looking at 500 businesses a year, over 25 years. Um, you know, that's almost what is that 15,000 businesses, a 12,500 or something like that over, um, over a period of years. So we've seen the good, the bad and the ugly. We also have senior operating partners, one has run 17 different businesses, one's one, three, and the other has run two. And in varying markets and industries where we have an actions where we've been the industry before. How can we accelerate growth? Um, how can we mentor, uh, the, the, the, the CEO, the business owner.

Bobby Kingsbury: Can we answer those questions? Mark can actually tell you, you know what, one of the things that he drove at TGC is, uh, is, you know, what's near and dear to our heart, Ryan is his Traction by Gino Wickman and running the entrepreneurial operating system. And that helped Mark really from a strategic direction standpoint, you know, it was really just him and a COO and in the first year we hired a VP of sales and marketing, a CFO and the VP of supply chain. In year number one in three facility moves, OK. Did an ERP implementation integration and grew the business during that timeframe. So, you know, I, it's Kudos to Mark and his team to being calculated, to walk before they run, and being able to get everything done. If they didn't have a plan in place, it wouldn't have been successful. So Mark and I talk really casually, casually just it at least once a week. That's not a, a cadence for us. Um, it, it just happens, you know, just just pick up the phone or he'll pick up the phone and say, Hey, you know, this is what's going on with the business. Any thoughts? Or I'll pick up the phone and just say, hey, you know, what's, what's going on? Do you want to go to dinner this weekend? Um, and then, uh, we have monthly reporting, uh, and then we also have quarterly board meetings. So that's, you know, our, our communication and cadence.

Ryan Tansom: Well I think you were saying that, I mean it's just, it's a partnership and I think this is, you know, give, give me your perspective Bobby on the mindset of entrepreneurs. Right. So obviously Mark is still enjoying and looking in, in to the future and having fun. How many times [cross-talk] you know versus the, I guess where I was getting with that is, you know, you look at all these businesses, I mean that's a significantly high volume of businesses that you're looking at. And how many times do you see it when, you know, someone might have a good business, but they're just done. And you look at them as an individual and that literally will decide because they're burnt out and you're essentially they want to drop the bag in your lap. I mean, how does that mean? How quickly can you assess that? And you know, I think it's important that people look way ahead of time so they don't get to that. But I mean, tell me what, how do you feel when you see that?

Bobby Kingsbury: We feel that we're going to run in the complete opposite direction. Um, and uh, I'll tell you that, you know, right away if, if we see a business owner that's like that. So for us, when we're focusing on, on leveraged recaps, where we're partnering with incumbent ownership, if a business owner is 50 years old, OK, now that business owner has a lot of running room to go in, in their career and they want to sell us their business and they don't want to participate in the equity or they don't want to continue to run the company. What do you know that we don't know? It's the first time that just provides us with some [unclear]. And it may be, you know, good, bad or indifferent. It just provides this, this immediate lack of, uh, of trust that they know something that we don't know. Now, if a business owner or 65 or 70 years old, I get it, you know, I certainly understand, you know. And that what you have to do is, you know, for example, that business, um, that I discuss the 6,000,000 in revenue and 2.5 of EBITDA, that business owner is 65 years old. He's lived, you know, outside of the state, down south for the last 12 years. Now, I think he's important to the business from that he's provided strategic direction for the business, but the day-to-day operations and everything has been going on, he hasn't been there in 12 years, you know, he's 65. He would like to retire. So I understand that. What I would like to do though, and this is how I, you know, I would present it is you know, I'm going to present him an offer and I also want him to, um, I'm gonna provide incentive for him to have five percent of the business moving forward.

Bobby Kingsbury: And now it's, it's not a ton. It's not 20, 30 or 40 percent, but, but I don't want him to walk away day one. I would like him to be a board member and I want him to be a vested board member where he can still, I mean, he's been in the industry for 30 years. I don't want that walking away day one. You know we're, we haven't been in that market for 30 years with. We will never know as much about a particular business as a business owner does and we're smart enough to realize that what we can do is from our experience in different businesses, provide business best practices, um, open up doors to new industries, to new customers, to lean manufacturing, to EOS, you know, provide value in, in different ways outside of that business owner's box that they've been in for 30 years. But in terms of getting in that box, we will never know that box as well as they do. And we don't want them to walk away day one.

Ryan Tansom: You hit on a bunch of really good points in there. But going back to that to the 50 year old. So let's say, so I totally get it because that's just sort of the same thing I would ask is what do you know that we don't. Why do you want to walk away? Let's, let's throw a curve ball, Bobby. What if that was me, I was 50 and I said here's… I want out, but let's say I had an EOS terms. I had an integrator, so a COO or general manager, I had an executive team and it was a passive investment for me.

Bobby Kingsbury: Then I would say it's totally different. If you weren't in the business day-to-day. Now can I ask you if you're the visionary?

Ryan Tansom: Right. I think that was, and for the listeners who don't, aren't familiar with EOS, divisionary is like the, the, the CEO who's driving the strategic ship. I think that's a good question, right? Where I actually, I'm, I'm, uh, working with this gentleman who, he literally has an integrator and a visionary and he literally, he's more like the board member, now. And he's like in his forties.

Bobby Kingsbury: In that situation, we are OK with it. Um, you know, there's been different situations where we've had a, a business owner that, you know, said, hey guys, you know, just want to let you know if we're going to do a deal, I go sailing six months out of the year. Are you guys OK with that? And we said, Bill, how long have you been doing that? He said, oh, the last 10 years. I said, then we're good at the business has performed like this with you on a boat for the last six months, why don't you stay on it for twelve?

Ryan Tansom: Don't you think, Bobby, it's all about he building a healthy, sustainable business because then it was options because no matter what route you go, you've answered all the questions and the concerns and the risks that a buyer would have.

Bobby Kingsbury: Yeah, you're exactly right. If you have a management team that can run the business without you both strategically and tactically, it mitigates a lot of the risk for the private equity firm because at the end of the day, most of the risk, uh, it's probably 50/50 in the business and the people you know, and I would much rather invest in a good business with great people than a great business with good people every day of the week and twice on Sunday. That's what I would do. So people from our standpoint are vitally important. And if you can have a team that could run your business, it'll help mitigate some of the risks from private equity and you'd be able to really get the value that you deserve for the business.

Ryan Tansom: I think that was a very good note as we're wrapping up here. So we're going to have the next episode in this series is going to be bobby and Mark. So Bobby, as we're wrapping up, which we've covered a lot of ground here, man, I've had a blast. Is there one thing that you want to highlight that we've already talked about or if we kind of missed something in the, in the journey and the process, one thing that you want to leave the listeners with?

Bobby Kingsbury: Yeah, you know, uh, if, if most of the listeners are business owners, I would just, you know, really encouraged them to be careful to be thoughtful in choosing the right partner. Even if it means sacrificing a few dollars up front, you're going to be much happier in the long run. And, you know, really due diligence on, on the private equity firm, like I said a few times too, I would do the QOE beforehand to avoid any re-trading that might happen. You know, it will certainly help mitigate that. It's really a value, your team. If you have the opportunity to build your team at the right time, I would suggest doing it.

Ryan Tansom: Awesome. I really, really had a blast. Bobby. Thank you very much for coming on this show. And for the listeners, we're going to have MBark who bobby mentioned a couple of times on the next episode and we're going to be able to figure out what was Bobby is full of shit or not,

Bobby Kingsbury: Hopefully I'm not! But thanks for having me today, Ryan. Look forward to it and you can see, you know, it'll be interesting to see that for the listeners, the dynamic between, you know, private equity firms, at least MCM and, and their portfolio companies.

Ryan Tansom: Actually, before we leave, what's the best way for our listeners to get in touch with you?

Bobby Kingsbury: Uh, they, they can call me. My direct dial is 216-514-1843 or my email is Bobby b o b b y at m, c m capital Dot Com.

Ryan Tansom: Thanks for coming on the show.

Bobby Kingsbury: All right, thanks for having me, Ryan. Take care.


Ryan Tansom: Thanks so much for sticking in there to listen to the entire episode with Bobby. I think there's a just a couple of big takeaways I want to highlight. Really looking at your business as an investment and as a product is one of the most healthy things that you can do as an entrepreneur because, regardless of how you started your company, whether it was in a basement or garage or whatever, your ability to build a machine and mitigate risk of transferring that free cash flow and that EBITDA to someone else, no matter who it is, is going to give you the most amount of options to make sure that you're partnering and selling to the right person for the right reasons and the right price.

And if you don't like that situation, you can walk away because you built a healthy business. And I think the other thing that I really want to make sure that everybody takes away from this is that if you are asking the right questions of any potential buyer, there's a really big need out there for people to be deploying money and spending it and making investments. So don't be the victim of a six month distraction if you know for a reason why you want to sell for what reasons and you know exactly what kind of partner you want to partner up with, you can interview them and then you can take the control because you've done the due diligence and you know what your business is worth. You've built a machine and you know exactly what kind of potential buyer that you actually want to partner up with. The whole goal is to have control because that's why you started your business and the whole goal is to control the outcome for the legacy and the biggest asset you potentially have in your lifetime. So I really hope you enjoyed the episode. Stick in for part two with Bobby and Mark so you can see what it's really like from the seller's perspective of someone that's open and honest of what the entire process was like and what they're doing now and how that benefited them and all the different challenges that they had. So until next week, go onto itunes, give me a rating. Otherwise I will see you next week.

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Written by Ryan Tansom

Ryan Tansom

Ryan runs industry-specific podcasts on his website which pertain to mergers and acquisitions, and all the life lessons he wish he had known then. He strives to bring this knowledge to his listeners in a way that is effective and engaging by providing new material each week from industry experts.

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