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

Thomas A. Stewart is the Executive Director of the National Center for the Middle Market, the leading source for knowledge, leadership, and research on mid-sized companies, based at the Fisher College of Business at The Ohio State University. Stewart is an influential thought leader on global management issues and ideas: an internationally recognized editor and publisher, an authority on intellectual capital and knowledge management, and a best-selling author.

Before joining the National Center for the Middle Market, Stewart served as Chief Marketing and Knowledge Officer for international consulting firm Booz & Company (now called Strategy&), overseeing the firm’s intellectual agenda, major research projects, and strategy + business magazine. Prior to that, he was for six years the Editor and Managing Director of Harvard Business Review, leading it to multiple finalist nominations for a National Magazine Award. He earlier served as the editorial director of Business 2.0 magazine and as a member of the Board of Editors of Fortune magazine.

If you listen, you will learn:

  1. What is the National Center of the Middle Market?
  2. Who is the “middle market?”
  3. Tom’s background in business.
  4. Why middle market companies are important to the economy.
  5. The 3 purposes of the Mid Market Center: Education, Research, and Outreach.
  6. How innovation happens in business and what does the middle market have to do with it.
  7. The importance of having this knowledge about your company for investors.
  8. The cluster analysis and surveys conducted by the Middle Market Center.
  9. The 7 Factors of Growth.
  10. The 3 Groups of Leader Types.
  11. The 2 factors that are uncontrollable by management.
  12. A recent M&A study and the findings.
  13. The 9 value points of fitness for a company.
  14. Tom’s final thoughts.

Full Transcript

Tom Stewart: Business to change sports metaphors, business doesn't end after nine innings. It doesn't end after extra innings. Business doesn't end, so there's always another inning. There's always another quarter and and eventually maybe. Yeah, eventually you sell. Eventually something happens to a business you hope you have to, you hope you can sell when you're at the top of your game, but basically there's always another quarter, there's always another year, and so to be able to say, I won the game today is great, you know, or, or I had a great at bat, that's great, but what you really need is you need to that that you need the capabilities and the consistency to do it over and over and over again and to still find it refreshing and fun.

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: Hey everybody, welcome back to the Life After Business podcast. This is episode 118 and today's guest is absolutely awesome. He has so much data and knowledge and experience that I cannot wait for you to listen to this episode. So we're starting to get a bunch of subscribers to the show and if you have been listening for awhile, you probably are familiar with a little bit of my story on how we sold the family business, but the big things that I'm passionate about that I'm trying to understand in the mid-market is how little data there is and how little information there is about how to grow and sell companies. And I've gone and got my exit planning certification, the value building certification, all these different things in order to really start to understand what does it mean? What is the true information that we should be looking at as owners?

Ryan Tansom: Because we need to pay attention to this stuff in order to understand what game we're playing, to understand the landscape that we're dealing with. So that way we can go in the direction that makes the most amount of sense for creating value, judging the different exit options, judging the different buyers and how that impacts the things that you want. And honestly, until I met Tom Stewart who's the guest on the show today and understood what he's doing, I really struggled trying to really trust the different sources of information because in the mid-market it's a lot of "he said, she said", there's small pockets of information, surveys, studies, methodologies. We have traction and scaling up. We have vistage and EO. We have all these different things that are really trying to drive to the business owner and to us as entrepreneurs of what's important? How do we judge our success, how do we judge the decisions that we're making and what is the context of everything that we're trying to do?

Ryan Tansom: And the amazing thing about Tom Stewart, so his background is that he was. He's a publisher so he's written a couple books. He was on the board of editors at Fortune magazine and for six years he was the chief editor and managing director of the Harvard Business Review and essentially spen so much time in the top research and information for businesses. And what he kept realizing there was this huge pocket of information that was missing on the mid-market and now he's the CEO of the National Center of the Middle Market where their whole goal is to research, distribute knowledge and educate. He'll be giving his little background and then a little bit, but the reality is he has more data about what's going on in the mid-market, between 10 million and a billion. What's important to us entrepreneurs that are running privately held businesses that have all these different things going on. So today we're going to be diving in to the sheer amount of data that he's collected and his team has collected behind the seven different factors that will increase and drive the growth.

Ryan Tansom: So what are the things that the most successful businesses are doing in order to continue to scale? And he's got seven different factors that he discusses. There are three different types of entrepreneurs that he discusses, the innovators, the investors and then the efficiency seekers, and then we're wrapping up with the nine different things that they've identified in order to do successful mergers and acquisitions from the buy- and the sell-side, and the whole conversation was just amazing because of how well Tom articulated the information that they've found and how important this is to you, the listener, who has a business that needs to grow and sell and understand what game you're playing. So I really, really hope you enjoy this episode. We'll have all the links to all the information in the show notes on the website on GEXP Collaborative. So if you have any questions, reach out to me or reach out to Tom. So without further ado, here's my episode with Tom.

Announcer: This episode of Life After Business is sponsored by GEXP Collaborative. 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 buyer of your choice at the price you want.

Ryan Tansom: Good Morning, Tom, how you doing?

Tom Stewart: I'm doing really well. Ryan, how are you?

Ryan Tansom: I'm doing good. I am very excited to have you on the show. You have quite the track record and you have a lot of information. I think most entrepreneurs in the mid-market want to hear and you've got it coming from all different angles, but before we really dive into it, what, um, why don't you give the listeners that are not familiar with you or your background or the mid-market company that you're working for and the stuff that you're doing. Can you just kinda give them a little bit of a backdrop of how you got to where you are and what you guys are doing?

Tom Stewart: Sure. Um, so you know, as, as you know, I'm the executive director of the National Center for the Middle Market. That's a research team, uh, at the Fisher College of business at the Ohio State University. Uh, we are a collaboration between Ohio state and our sponsors who are Suntrust Banks, Grant Thornton and Cisco Systems. And we've been around for seven years, seven and a half years we were formed, actually with, with, with the founding grant from GE Capital back then, we were formed the mission of sort of learning about and teaching to mid-size companies and, and the, and the reason for that is that there's a whole lot of vague, it's almost a white space on the map. What the, what's the middle market is. When we started out, first of all, there's no uniform definition. So, so we started out sort of saying what the middle market is going to be, the middle third of the private sector.

Tom Stewart: Let's find that. And when you do that, you set your sliders to a pretty wide revenue band of 10 million to a billion dollars in annual revenue. That's two orders of magnitude. But, but they're bigger than small and smaller than big. They're mostly not startups with discover, their median age is 31. I have a wise crack that says that these companies are too big to be exempt from regulations and too small to buy a congressman of their own. But they're also, they're, they're kind of the forgotten middle child. Uh, and, and, and the reason in part is that the big guys can create their own weather, the small guys by terms of sheer numbers, I mean millions and millions of moms and pops and the role of Chambers of Commerce and the Small Business Administration which exists as an advocate for them have a voice, but in the middle, low voice is muted. It's dispersed. Most of these companies are private eye and that fits very much into, into your story, Ryan, which is 85 percent of them are private of that group, of the 85 percent, about a third are family businesses, uh, about a third are private equity owned. And as you know, in many cases those were businesses that were family businesses that sell to private equity. And then another third are partnerships or sole proprietorships or, or closely held, three or four guys get together and say, Hey, let's put on what, let's create a company. So there, and there's some, there's some different sort of structures in there. So it's a really interesting group of companies of companies. Now, for me, part of what's fascinating about it is that I'm my own background, like a lot of people's is in business is really different. I want my, I started out my career in the book publishing business, but then I went and started working for Fortune Magazine and of course our bread and butter was the Fortune 500, uh, and you know, corporate giants and right, you know, from time-to-time about smaller companies.

Tom Stewart: But Hey, people wanted to see, you know, General Motors, IBM, Bill Gates, those are the guys that wanted to see on the cover. You don't sell more copies of Fortune by putting the CEO of Tootsie Roll on the cover of the magazine. Right after Fortune, I went to Harvard Business Review and I, I ran the Harvard business review for half a dozen years. And again, one of the things that's really interesting about academic work, well first of all, HBR's focus is, again, it's largely, the emphasis is partially on large and often multinational corporations. Not entirely, but that's the emphasis. And that's also partly true because academic researchers, well you know the old story about the drunk who looks for his keys under the lamppost because the light is better. Scholars need data and there ain't no data about private companies. There's very little. So again, I wasn't seeing much about them.

Tom Stewart: After hbr. I went to work for Booz and Company which was, which no longer exists. Booz and Company was spun off from Booz Allen Hamilton or do we divorced and Booz Allen Hamilton did all the government services stuff and Booz and company did the commercial strategy consulting and Booz just sold, sold about four years ago to PWC and is now called Strategy. And - it's the strategy consulting advisor group of PWC. And again though our focus tended to be with bigger companies, some of them public, some of them private, but big global companies. All the strategy firms really emphasize the McKinseys, the PCGs, the Bains. At Strategy And the focus tends to be a larger company. So I came to the middle market like I've been doing a lot of research and thinking and writing about business written at that point, two books and the third book after that, but all of it had been about basically, you know, the assumption was that there was a public shareholder and the assumption was you were kind of big and I walked into this world and I thought, where have you been all my life the most... You know this, this is the most fascinating group of companies I've, I've, I've ever, I've ever worked with. I mean, I can tell you, I will. We've got time. I can tell you stories about little company here, a little company. I mean a couple of years ago, I'm up in Buffalo, New York and I'm meeting with a bunch of people and among the people I'm talking to and meeting our, our companies like this new era, they make sporting half the time if you're wearing a, you know, a twins baseball cap or, or a, a vikings cap or something like this it may be made by New Era, right? So middle market company makes these caps, another middle market company. You're driving down the road and you see a truck with a roll down backdoor, backdoor on the truck and it says Whiting, you seen that thing says Whiting on the back of the truck? Middle market company, or you go into a bar and you'll put your foot on a borrower on a bar, a bar rail.

Tom Stewart: That bar's probably made by a company, that bar rails probably made by another middle market company called Keg Works there outside of Buffalo. And they are, they are, they make other kinds of bar equipment, but they are among other things, one of the biggest makers of bar rails in the United States. So you're discovering companies like this all over the place. Sports teams, craft beer that you heard about. So if you haven't heard about it, it's a microbrew, right? If you have heard about it and it's horse piss, Sam Adams, Ebeeta beer, Corona brewdog here in Columbus, Ohio, a great lakes, a revolution, brewery, beers in Chicago. Uh, I don't, I don't have the Minneapolis one where you are.

Tom Stewart: The best thing about the middle market is the food, you know, I mean it's great. Great Bunch of companies.

Ryan Tansom: So then how did the, what was the mission for a couple of questions Tom because you know, the mission that you guys have, you said, where have you been all my life? What was it that you are trying to solve? And then also kind of... It's funny because I agree with everything you're saying. You and I could probably ramble back and forth about ways to make money and help people do it. It's just mind boggling and, but you know, the way that I describe it me when I was telling you my story or these, all these people that I work with are these stories that we hear. The word, my analogy I've given time is it's like the world of real estate. Before the Internet, before Zillow, you'd have to literally hire a real estate person to go take fliers [Tom interjects: And drive from house to house.] Like, Hey, what did you sell your house for? And like, you know, like there's literally no information out there whatsoever and it's just kind of like the wild wild west yet like you said, there's a third of these people that run our economy and there's like, there's not a whole lot of stuff around there. It's just, it's so antiquated. So I'm just curious and like what was the mission and then how have you guys been involved in, what have you been doing over the last seven years?

Tom Stewart: Yeah. So, so I sort of think of the mission is as, as being, well there's sort of three kinds of things that we do. We're part of the Ohio State University. So. So education is an important part of what we do. Research is an important part of what we do and outreach is an important part of what we do. And if you think of those, you could almost make a, make a matrix, the former consultant in me showing up and saying here's a slide, but you know, you think one of the things we do is we try to create knowledge about the middle market. So who are these guys? How important are they? How much do they matter to local, state, national economies, how critical are they in different industries because as they said, they sort of fly below the radar. An example of that is we do a lot of work with the Brookings Institution and they're doing a lot of work with cities on economic development and if you've talked to a lot of the economic development people in cities or look at how they spend their time, they think about let's support small business. Let's have yet another biotech incubator, or let's try to offer a subsidy to a new sports team or let's or, or to keep a sports team or let's offer a big tax break for a big company to come move here. Well, that's how they spend their activities, you know, stealing subsidies and startups. But if you want to look at job growth, the job growth comes from supporting the mid-sized companies that are already there.

Tom Stewart: So, you know, knowledge of a knowledge about the middle market is critical for policymakers. Journalists need to know about it. Academics need to know about all kinds of. People need to know that there's plenty of territory not illuminated by the lamp post. The second kind of knowledge is knowledge for, because that goes to that other thing that scholars in consulting firms and the magazines that write about business with, sort of stuff that gives you managerial insight that focuses either on entrepreneurs - Inc Magazine, God bless them, they're great - or on big companies and there's, but there's very little so, so take for example, innovation and what we know about innovation. A lot of the sort of research about innovation has to do with like portfolio theory and how do you develop a, you know, a pattern of a plan for, for, for innovation that has some relatively safe close-in batch sensation. Some are out there, but we discovered that a typical middle market company has three projects in a year.

Ryan Tansom: Yeah, it's not necessarily portfolio theory. It's like okay, they jumped on her table or was there an executive with a really good idea or they were in like a peer group that someone brought up something.

Tom Stewart: Yeah. Now it does turn out. We've done studies that show that having a predictable budget for innovation makes a huge difference, so it's not just like, you know, an on off switch and it's random, Oh, this year we're going to do something, but you know, you just the basically you can take a look at the literature on innovation and if you're running a mid-size company you can throw out three quarters. And the same thing is true with supply chain. Again, almost all of the stuff on supply chain is about, hey, this is how Proctor and Gamble manages its supply chain and that's interesting and important, but most mid-size companies are links. So we did a study on how to link, see what makes a perfect link, how do you succeed as part of somebody else's supply chain. Nobody had looked at that so, so we do knowledge about and knowledge for and sort of the mission is to help these companies grow and succeed more and to help that success be recognized so that you know, hmm, in the larger business ecosystem, whether it's policy or anything else, the middle market companies are at the table. So that the answer that they're recognized and, and, and get, get a say in that environment.

Ryan Tansom: Well I, I absolutely love the mission that you guys around because I think it is such a black hole and the, the, you know, I've never had actually had a perfectly articulated like you have or like because all these. Well, well, well-rehearsed but I think honestly Tom, it's like, you know, when I look at. So I just kind of giving a little bit more context for it, but I think about where I came from or my clients or the people that are listening to this, they're probably in, you know, EO (Entrepreneur's Organization) or Vistage or Tab or all these people and they have big problems.

Tom Stewart: I've worked with Vistage and former tech. Yep.

Ryan Tansom: It's still complicated to being able to get to the information to be able to judge what you're doing compared to. It's still a lot of "he said, she said", but there's no like, hey, you know, I'm going to pull up, like you said, all these publications or research where it's like not really applicable to you. You know what I mean? Like and throw all the different dynamics and it. But um...

Tom Stewart: can I give you an example of that? [Ryan interjects: For sure.] We did a study a couple of years ago actually. This was inspired by some we did when I was at Booz seven or eight years ago when we took public company data and looked how well people are managing their working capital, right? How, how, how fast are you paying your bills, how fast are you getting paid, how much inventory, you know, how much money are you tying up in, in running the business? And we discovered that for big public companies there were enormous differences in their efficiency with working capital management. So I said, hey, let's do this for middle market companies. And so we did two things. One, we did a survey which we asked middle market companies, you know, about their working capital practices. And we also asked them how satisfied are you? How well do you think you manage working capital? And 75 percent said that they on a five point scale put themselves in the top two box. We, you know, extremely well or very well. We are satisfied with how well we manage working capital and then we compared this because we took a public company database because you get these data for midsize companies and I said here's the benchmark data and what we discovered is that of those people, the 75 percent who say they're very highly or very satisfied, at least half of them are way wrong because. Because the gap, I mean whether it's payables, receivables or inventory, the gap between the Twenty Fifth Percentile and the 50th percentile is two x and between the 50th and the 75th is two x. So the gap between 25 and 75 is four x. On average, midsize companies pay their bills 16 days before they get paid. Just to take an example. And so I, I just, I thought that these, first of all they need the. They didn't know. So the presence of benchmarking data to your point is a way of saying, oh wait a minute, I could do better. And, and without these, without the sort of, Gee, what's best practice? It's kind of hard to know how well you're doing. The other thing I thought at this sort of gets to some of the family business questions is in many cases these guys are not satisfied. They're satisfied and they say, you know what, I like to go home on Friday knowing that all my bills are paid. I like to play golf. No, I don't know. I don't own a penny to anybody. And so they're, they're comfortable. That feels like a safe place and yet it's like they're driving a car getting 25 miles to the gallon when they could be getting 40 miles to the gallon. It's, it's, it's, you know, it, it, it's and knowledge can give you the real power to change and midsize companies need it.

Ryan Tansom: That's well said. And I think about this. I want to tie in because we've got a couple of those, these, these big reports and stuff like that that I want to do, but before we do that, Tom, like the, when you said that knowledge is the power to be able to know how you're. Well, you're doing and it's so difficult because otherwise you're just stuck in like essentially a solitary confinement by like, okay, like I feel good right now not having any clue what the rules of the game are and like how else can, you know? I just didn't even think about like what that working capital, how do you go to your, you know, your vendors or your clients and explain to them why you want to modify what you've been doing. If you have no reason, you know, you can articulate a reason if you've got no benchmark, so therefore you just leave it as is because yeah, you just have this fear of the unknown. Like I just think about some of our big clients were like, they kind of just bull you around and you deal with it when you, if you were to explain to them, hey, like here's all the information that I need and here's how I'd describe it. But you know, just as a nugget for later, we can circle back to this. But I think that your example and working capital's great or the big huge problem that I see is most of these people have zero idea how much their company's worth and why. Absolutely. There's no interest. That's where it really gets into the world before zillow and it's, there's just, you know, and there's a lot of, you know, pros and cons of them. Mainly cons, since a lot of these people get to know a lot of owners like ourselves that listeners they get taken advantage of because it's a game that they have not been educated with rules by. Yeah, yeah, yeah. Absolutely. So let's. Was that sorry, I just get pretty passionate about it that. But with that, I think you know, what

Ryan Tansom: you guys are doing and I, as I was saying on the website that the listeners will have to go to and the reports, but have have been focusing on your time for the research that you're doing and how have you brought it together because you've got the seven different characteristics. You got some DNA. You're starting to get after seven years. Some real power behind what you guys have a aggregated. So maybe kind of give us a little bit of an overview of that.

Tom Stewart: Yeah, let's, let's, let's do two things. First of all, you mentioned the website and the website is middlemarketcenter.org. Uh, and we can mention that a few other times when people go through, but, but all of this stuff is there. I mean, one of the nice things about our being a, uh, an academic organization is we do gate it. We, you know, we, we, we sometimes we ask for your email address but, but uh, and it gives you an opportunity to sign up for stuff. But it's. But it's just a little tiny gate. It's a baby gate, and it's all out there and in many cases we even post some of the raw data. So, so one of the things that we do every quarter is this gets to the growth model we have. We have actually been able after a lot of years of doing this to be able to create a model of growth for middle market companies that we call the DNA of middle market growth.

Tom Stewart: And what happens is that every quarter we survey a thousand middle market companies for what we produce is our middle market indicator and we asked them couple hundred questions, I mean range. Well a couple of hundred different data points from each one and we've got industry and revenue within three bands, three groups. We've got location and we've got number of employees and we've got, we've got a whole bunch of firmographic data. And then we ask them how's business? We asked them about there revenue growth. Uh, they won't usually because they're private companies who won't tell us revenue numbers, but they'll say, I grew 10 percent, I grew six point three percent. Whatever it is we ask about employment growth. We ask about whether they've entered a new market in the last year, whether they've done a deal M&A acquired or sold anything. We ask them about it investment and so on and so forth.

Tom Stewart: And we asked them about plans, we asked them about future investment, throw all that together. We've now we've took five years of those data, 2012, 13, 14, 15, 16. And that means 20,000 companies. A couple of hundred data points on each one and I can't do that math so, but it's basically, it's a huge soup of data and we then did a big Bayesian analysis of that and you know, a Bayesian statistical analysis is one where you, you look for connections and correlations between things and, and, and, and you can weight them, ah, and you can in some cases you can actually infer not just correlation but causation. And so that was the first thing. And then the second thing is we took that and did a cluster analysis. So we, out of all of this, we ended up with a group of growth factors. Growth was what we were trying to, what explains growth and we were able to find a bunch of drivers that, that, that explained growth. And then we were also able to create three kind of types, almost mindsets about growth. We looked at the drivers, we then threw out two of them that were not under management control and one of them was the overall condition of the, of the economy. And, and we, we have a data point about confidence, about confidence in state, local and a national, or sorry, local, national and global economy. So we used that as a proxy for the state of the economy and the other was industry effects.

Tom Stewart: So we took out, I can't control the economy, I can't control my industry. I live or breathe with, you know, if I'm in healthcare, I'm happier than if I'm in a retail for example. But on retail is not doing too badly actually. But, but, but then we saw you throw out the industry effects and you're left with seven things. Seven sort of factors that, that come together in different ways to drive growth. And, and the, the, the first of them is sort of, it sort of seems kind of obvious, but it's market expansion, you know, am I expanding from, you know, Minneapolis to Missoula and from Missoula to um, you know, Montego, I mean, am I opening up new markets? And, and within that, you know, how, how hard is, how effective is my salesforce, do I have a communications and marketing capability? Am I not only attracting new markets but attracting new customers within those markets that I've got. Am I going global a am I pushing back against global guys who are moving into my space? So, so there's a bunch of activities and that turns out those, those market expansion activities turned out to account for a little under a quarter 23 point four percent of the growth of middle market companies. So it's a big deal. Second thing, the second factor was whether we have a formal growth strategy and, and let me. What this means is do we sit down as a management team and say, do we have a strategy or are we just sort of reacting to what? What's coming in there? Do we have a growth strategy in place? And do we have a way of translating our, our goals in our strategic intent into budgets and goals and plans? And do we communicate that? And by the way, it turns out a very interesting sub factor in there is, am I paying attention to keeping up to date with management thinking?

Tom Stewart: So, you know, actually it was interesting, I was talking to a company outside of Cleveland that said, uh, that, that when they first started their strategy was sorta student body left or student body, right? Said, you know, we get a new client and we'd swarm to that new client and then we get another new client. We'd swarm to that new client. We Said no and we didn't know and we didn't have a sort of a formal thing like hey, what are the kinds of clients we want and the kinds of clients we don't want. And it turned out they were, you know, as you can imagine, they were wasting a lot of time. They were, they were, you know, wasting resources, chasing will of the wisps, but also and also doing things that they shouldn't have done that, how do we get organized around this. That matters a lot.

Tom Stewart: And what's interesting is it matters both at all size levels. I mean it matters as much as $100 million is it does it 15 million or 500 million. So that was the second factor. And then right up and that was like 14 and a half percent of the model right under it to, you know, a 10th of a percentage point underneath it was investing and innovating. And that gets to what I was talking about earlier. It's like how I got this and it connects to plans and all these things. Link, right? Am I investing in new product and new product development? And by the way, have I got a budget? So I'm doing it every year and not just one moment the bathtub. Am I investing in systems and business processes? Am I keeping my factories uptodate? Am I constantly thinking about, you know, better ways in which, uh, I, I can, I can, you know, run the shop and build my plant and equipment as I need it. Do I think that I'm able to withstand a downturn? Have I, have I invested, I've got enough cushion even to invest. So that's the third factor.

Ryan Tansom: Well then can I just interject for a couple of seconds of your time because what I find is very intriguing about the sheer quantity of data that you have. And then by the way, for the listeners who like will have it in the show notes, but the, the, the cluster analysis and for, for most of us, we're all add entrepreneurs that are visually appealing to look at stuff. So this is not like some ridiculous white paper. You guys have done a really great job breaking into parts. You could literally look at charts and graphs and when you're going back to like your clusters of what you did for the, for the southern girls factors, I don't know if you ever saw linkedin did this for a little while Tom where they had you can like download that, uh, that analysis. And then you would be able to see who are your big, like essentially anchor connections to everybody else. Well that's essentially what you've done is you've, you've boiled it down to the bare truth and essence of what these are. Because as you were talking about the innovative and investing, you know, the, the, the complications that I see you that's out there in the other kind of sporadic data is it's kind of made up bs from investment bankers or private equity firms are different research tools that only researched a couple of things. So there's a lot of fragmented information that for me, when I look at this, I always go, well, why? You know. So like for example, like when you listed these three, you have all these sub things that interact to like essentially the main top umbrella, right? So I think it's just, I find it interesting of how you're analyzing this compared to like know, I don't know if you've got a comment on like all the other information that's out there. Like, because you know, you'd say okay, this investment bankers, like they're going to go in and look at it system, they, they'd list all this stuff. But essentially they're all rooted in one common factor.

Tom Stewart: Well and don't forget they are trying to sell something which is, you know, you can't blame them. So they are actually going to have, I remember once when I was talking to a Bruce Walsterstein 15 when I was at HBR, I did an interview with him and he was, you know, the uh, CEO of Lazard Frere. And before that he was at Boston. What was the name of the, I can't remember that he was famous when he was a young man as being 'Break 'em up. Bruce.' He was a private investment at one of those relief shareholder value guys. But he said that he liked as an investment banker to sit down with incoming CEOs and say, what do you want your legacy to be in five, 10 years?

Tom Stewart: And because it was a question they usually hadn't been asked and then he'd listened to him talk and after awhile he, he'd say, you know, I heard you say one, two, three, four, five, and you know, an investment banker can help you with two and four. And so maybe we can talk about it. So, you know, we're sort of in that first phase, we're not trying to say, and here's something we've got to sell. You were trying to say here's the picture and what's really interesting is, you know, the seven growth factors here are our know market expansion, former growth strategy, investing and innovating, then there two about talent and one about financial management and about cost efficiencies. So my COO and my CFO play key roles. The talent ones are interesting because there are two. There's not just one, so...

Ryan Tansom: You can keep going because I didn't mean to interrupt in the middle.

Tom Stewart: Of the two talent factors, one of them is am I attracting and retaining top quality people, including especially at the top of the house. So one is the quality of my human capital and the other one is am I developing my people and they are different. Obviously they're related, right? But one piece is have I got great raw material. The second piece is, and am I doing great stuff with the raw material, am I keeping it? I'm having great getting and keeping great raw material. And the other is am I developing and working with the raw material I have. One thing that's really interesting about mid-size companies is they tend to invest relatively little in staff development. One of the things we learned in some other research that we did is if they've got, if they've got an opening, if they've got a round hole, they look for a round peg and say, Gee, there's a square peg that I can, that I can, you know, widdled down. They look for something that fits harder to do now that we've got full employment and there are fewer, you know, round pegs out there, but when you think about it, so we are seeing more investment in training and development internally. But when you think about it, we were just talking to some guys at ADP and they were telling me that the rule of thumb from the Society for Human Resources Management is that you got one full time hr person for every 75 full time employees. So if you've got a company with 300 employees, you're going to have four people in hr. Yeah. How are you going to do training? We got that three generalists and an admin. Right. You know, so...

Ryan Tansom: I actually then there's this whole argument involved. Yeah. And I would argue like, are these people actually, are they mainly just admin? Because they're probably paying 70 grand for them and they're not leaders who are saying, what should we learn where it, what kind of resources, how do we educate those.

Tom Stewart: They're doing basic, you know, they're doing pay and benefits, job description, maybe a little succession planning, but even that is light. Uh, and at the end that's an important basic stuff, but they're not in a doing some stuff and they're doing some, some helping with recruiting, right? How do we, how do we find better people? But training and development comes after that. So the interesting thing is if you double click on that training and development thing, which is 10 percent of total growth, I mean train staff development, getting your people, getting good people is like 14 percent, but getting those people better is 10 percent. That's a non-negligible number, right? But it turns out that inside that more important than the formal training and investment in education, stuff that you do is, is providing career pathing. So that if you're working for me, I can see a path or you can see a path to your next job, to your promotion to how to become better. You got a mentor and a path and if you've got that, then in a sense you can start taking charge of your own development. I don't have to send you to a course or give you a, you know, a website or a or a little manual.

Tom Stewart: You will start. You'll say, ah, if I this you can take, you can take some responsibility for this. And that's, that turns out to be. I mean, that's something you can do with culture, right? Right. And it turns out to be something that is of non-negligible value in driving growth. So what are the things I love about this study? The DNA of middle market growth is you look inside and you think, Oh wow, look at this. Like retaining profitable accounts is a really important thing. And so is overall sales force effectiveness. So what can I do with my overall salesforce? What can I do to help my salesforce learn more about retaining profitable accounts? And if I put those two together, you can begin to say, Gee, this is what we're going to do with our reps this quarter, whether it's six months and it really turns into work that into something that is practical and, and, and I, I love the way that, that, that you could take these data and if you can just look at him a data sheet that's interesting, but if you take them with this sort of like what's in here that I can grab and turn into what we're going to do next year. There's actually a lot of richness in it.

Tom Stewart: So yeah, I, it's one of those things Tom where I've always operated like this and so it's confusing to me when people don't get the big picture because it's just what you described with the career pathing, but it's essentially kind of what you're doing for the entrepreneur and what both of us are trying to do. Or once you see, like I always say, like if you show someone that picture of a puzzle and you dump it all out on the table, you mean you don't have to show them piece by piece, you know, people can figure it out on their own and it's kind of like, what this date, these are these big data points. It's like, Hey, here's the big picture. Now you intuitively can counter refining, like you said, keep clicking into the subcategories and making less stressful like random in the dark shots.

Tom Stewart: Yeah. Yeah. I mean that's part of it. Uh, uh, one of the things that's interesting, I mentioned the cluster analysis and you mentioned that to you then take all this stuff, right? This is the seven drivers that sort of fit for everybody, but, but then the question is, I'm a management team, right? Uh, we're a management team when we think we've got 100 bucks to invest next year or it's budget season, hey, we're starting, you know, what's our plan for next year? And we think where are we going to put our resources? And we know there are limited and one of the things that we learned is that we created, we found, we w we named, we labeled, but we found these sort of three clusters of groups of companies that, whose growth was above average. And one of them we called the investors and when we call the innovators and one, we call it the efficiency experts.

Tom Stewart: Now these are not mutually exclusive. They, they're, they're, they're sort of, they're not sharp lines between them. They're fuzzy, but there's sort of like on the margin, are you more one or more the APP more or more one than the other? Two are the major in one and minor in the, on. The investors tend to be a little bit larger. They're a little bit more likely to be private equity owned. They're at a little bit. Uh, they, um, uh, their basic thing is, you know, let's build, let's expand. Let's put more into R&D, Let's put more into new factories and equipment. We're gonna, we've got money to invest in, we're gonna, we're gonna invest in that kind of thing. The innovators are a little bit younger, a little bit smaller. This is a too big a generalization, but I get a sense, I get a sense that they have less capital.

Tom Stewart: They're a little more capital constrained, but you know what, I may not have a lot of money, but I got a lot of ideas. And so I substitute intellectual capital for financial capital and I'm going to say, and this is why I think they're also tend to be younger and smaller companies, right? So let's come on, let's, let's build better mousetraps left, invent better, better processes. Let's do process innovation, product innovation, service innovation, and let's do that. The efficiency experts tend to be a little bit older. They are a little bit more like, Hey, growth is great, but profitable growth is really more, is really important. Uh, they, uh, and that's their focus. They're the, they're sort of saying like, how can we fund our own growth? How can we not get out over our skis so that we make sure that we're going to, we're going to be the tortoise or going to beat those hares and we're going to grow that way.

Tom Stewart: Now what's interesting is we mentioned these data came from 2012-2016, so that five year period, this is like, you might call it the Bermuda period of firms of business climate. You know, it's not too hot, not too cold. Interest rates are low, energy prices are low. There's no pressure. I mean, it was like no really balmy economic times. So in those, in that climate, the investors outperformed the innovators and the innovators outperformed the efficiency experts. I wonder what happens if you jack interest rates up three or four points. I wonder what happens if you get more volatility? Uh, I wonder what happens if you throw a bunch of tariffs into the market, you know, so, so if you get to a, whether that's a little bit less like Bermuda and a little bit more like, well, it doesn't have to be like Minneapolis but, but, but a little bit more, a little bit more variable, uh, your two different strengths and capabilities come to the fore.

Tom Stewart: But the thing that I like about it is you could think about this as, as, as a group, as a family owns a business or as a, as a, as a bunch of partners or as you know, oh, where are we comfortable? What do we, you know, what, what, what, what, What's our, not just where do we comfortable, where we excited, what turns us on, and what also makes it, what's our instinct? And if you think about that and you think, hm, now I've got these seven drivers to invest in. I've got these, this $100 to invest, but where am I going to put where and how am I going to think about my 2019 plan that supports this sort of identity that I have a that we have and that's us that feels like us. So our decision will be different from the decision of those other guys down the street because our decision reflects who we are and who and who we want to become.

Ryan Tansom: And what's really cool about that is I think articulating that, you know, the identity, but then also where you should be focusing your time. So again, it's all context. I just believe so much in context and you can make your own decisions and it kind of naturally go to the path that fits. But what I, what I find very interesting and as I, as I think about the challenges that a lot of owners have after they sell and you know, whether it's a private equity recapitalization or selling to a third party or to their managers, whatever exit option it is, they probably haven't articulated who's sitting across from me. So if you think about an innovator that sells to an inefficiency person, thinking about just, just what you just said, how frustrating that would be regardless of how much money you made or if an...

Tom Stewart: Yeah. So maybe it may be what's happening, you know, it may be, that's, that's the future of this company and that's what. But it could be the other way around. Yeah.

Ryan Tansom: Well, and I think it's just being conscious of it then you can ask, right? So like what are we going to be doing with their money and how are we going to be spending our time? Because, you know, if you have someone that's, you know, an investor that wants to grow, grow, grow, but then, you know, they sell... I just find that interesting because it's about the money, the motivation, and the personality types like you said.

Tom Stewart: You know, we did it. We did, as you know, we did a study on middle market M&A at first part of this year. Uh, and we found a whole lot of interesting things about this and one of them, first of all, one of the things we found is that there's this sort of steady drum beat. People keep thinking there's a big increase in m and a, there, there, there isn't. It's about, you know, in any given day, in any given year, about a quarter of middle market companies will have either bought something or sold something. Mostly buyers. It's about 20 percent will have bought something and about five percent will have sold or sold something. And you compound that over four or five years. And that means like a lot of them have had some kind of a transaction. But one of the numbers that really shocked me in here was the, the first number is, is you how inexperienced middle market companies are both as buyers or sellers. Like for 29 percent of companies that had made a deal and the previous three years it was their first-ever acquisition. And for 41 percent we've made other buys, but it's not in, it's not part of our strategy.

Tom Stewart: So 70 percent of the buyers were inexperienced sellers, 46 percent had never sold anything, nearly half at 44 percent had sold parts of the business before, but it wasn't integral. So 90 percent of the buyers of the sellers were, were inexperienced. And then you looked at were you intending to buy or intending to sell? And the first number that surprised me is 20 percent, 21 percent of the buyers were not expecting to buy something, but a deal showed up, you know, the lawyer called and said, Hey Ryan, do you know that Joe's for sale? What? Something happened, right? And so they were not only inexperienced but unprepared, like, oh shit, that's an interesting idea. 45 percent say we're always looking for opportunities and, and, and, and, uh, and, and, and, and this one came along and 33 percent said we made a strategic decision and look for a target.

Tom Stewart: So one out of three said, let's go by by wearing the gadget business, but we need widget capable. That's fine. The best widget maker, only a third had that. 45 percent are saying, well, we're always shopping. Oh, that looks nice. And 21 percent were completely unprepared. But then on the seller side, the 45 percent we're not planning to sell.

Ryan Tansom: That does not shock me. But that is so crazy to actually have the numbers.

Tom Stewart: Well, it doesn't shock you, but didn't you think so. So what, what is that? It could be that somebody died, right? So it could have been a tragedy. Could have been somebody died, somebody gets leukemia, somebody, whatever it is. Oh my God, mom's dead. We've got to sell the company. Whatever it might be a or it could have been the phone rang and somebody said, Hey Brian, I got a deal for you.

Tom Stewart: Would you, have you ever considered selling? Now I'm not concerned we could pay a lot of money now I'm not going to. We could pay. Oh, that's interesting. You know, so 45 percent of the buyers were not in the market. So when you think about it, you know, they're naive, they're unprepared and then, then you got another one. We, we sort of asked about, um, the toughest challenges for the buyer's ability integrate was the toughest challenge and assessing the true value. You mentioned that earlier. What is this really worth? Because you know, there may be often cases with family businesses, for instance, the accounting isn't GAAP accounting, tax accounting, you know, so I've got account, I know my books, so for the tax man, but I really don't have books that will allow somebody else to put a value on the business. But the integration comes to that culture issue.

Tom Stewart: That was like assessing the culture of the target innovator, efficiency, expert investor. That's, that's a big problem along with integration of the acquisition, which is another, you know, finding the right target or buyer was, was really confusing. So on, on all ends of this, you get this, this issue about fit, it really matters. Fit and fitness, right? One, do I have the right match? And, and, and, you know, and by the way does too. I have to sell just because somebody who rang the doorbell offered me a ton of money. I mean, that may not be the right buyer. Uh, it may not be right for my employees for, you know, it may not be right for the, you know, from my legacy, you know, there, there may be a lot of considerations that I have. So fit is a big deal. And the other thing is, as I said, fitness, go back to that working capital figure.

Tom Stewart: She's sold to a private equity firm working that, all of that value, that free money that would be freed up, why don't you get that instead of waiting for the buyer to get it? It'll drive your purchase price higher. But, but the other things is like if you want to think about what it would take to be deal ready, remember 45 percent of the time you don't know, you know, you walk around the corner and somebody says, Hey, you want to make a deal? What would it take? You'd want to be, you'd want to have clear governance. You want to know who's, who makes a decision, what is the operating authority? Does your, does your aunt Mary who owns 10 percent have a veto power? You know, these are things that families often it, right. Talent, I've, I, I've got, you know, a company of 150 people and 20 of them are critical.

Tom Stewart: Have I got succession plans? Have I got a plan so that if we, so that they'll stay. If we lose control, you know, what's my talent plan a and if I haven't gotten retention plan, I've got a succession plan, right? Accounting are my books in shape. I mentioned that planning, have I got plans, budgets and KPIs so that I can. So that by the way, that'll save a whole ton of time and due diligence on one side [Ryan interjects: and you get more value out of that too.] Exactly. Likewise. Operations, right? Have I documented my processes or as the only person who knows how to fix the fax machine, the 64-year-old admin who's not going to stay, you know, a working capital and mentioned that technology. Have I got, you know, I mean cybersecurity and technology due diligence is part of M&A now it wasn't five years ago, but you know, whether you're buying or selling, it's like if you were buying a house, we could have, we could buy a house without an engineer looking at it, you know, technology. Advisors, like I've got an accountant, I've got a lawyer, he's the family lawyer, participant lawyer know anything about M&A? Does that lawyer? No.

Ryan Tansom: You're hitting a cord with me.

Tom Stewart: So, so, so you want to build those relationships in advance so that you don't have to build them. Like, oh my God, I need a lawyer right in my ear. You don't want to hire a lawyer when you know, when the cops were at the door. And also peers like one of the things both buyers and sellers save face is there is a, I think the scientific term is a shit ton of private equity money, trillions of private equity money out there waiting to be invested. So if I am a company and I want to make an acquisition, I'm as a strategic buyer. I'm competing with financial buyers. So one of the things that I can do is I can get to know my industry peers better so I can say, Hey Ryan, maybe we should get together or I can make deals.

Tom Stewart: There's an interesting company called Gasking. They do flat bed trucks, uh, and they've grown to about $2,000,000,000 company by acquisition and they've never made a hostile acquisition. They've mostly bought moms and pops small companies, uh, you know, $50 million, $20,000,000 companies across the country by getting to know the industry and saying, I like this guy, he's a great operator. He fit with us. And so they, they have been able to grow a tremendous and very profitable business in part by expanding a peer network so that they are thinking hard about culture, too, so that they, they have been able that they're an investor in our profile, uh, it a model in the DNA of middle market growth, but they've used that to, with brilliant effect in M&A as a deal maker, uh, and, and, and used that peer network. So those nine points, you know, and this is all in the middle market acquisition, middle market M&A study of governance, talent, accounting, planning, operations, working capital technology advisors and peers. Boy, every one of those can make you a better buyer or a better seller. And if you're selling and moving to Scottsdale, you know you're going to be able to buy a bigger house.

Ryan Tansom: Well, and I think, you know, there's so many takeaways that I absolutely like it's when I find crazy go, I'm going back to Tom, is that there's no place to go find this information and then to like say I'm an analogy guy. So it's like, okay, that'd be like you and I, you know, I always go back to checkers versus just so like there are different rules or different games with the boards kind of look the same. So you know, you don't know what game you're playing if you don't know all this information. So you know, you got the nine points of the value building and like understanding m and a, but then you get the three different profiles and then the seven growth is growth. The accuracy.

Tom Stewart: And by the way, no, I was going to say they're all prime numbers, but they're not. Nine is not a prime number that we should have had 11.

Ryan Tansom: There you go. So going back to one of your points earlier is the chances that someone that knows nothing about buying companies finds a company that buys that know that that person's never sold something and you literally have two people bumbling around with potentially people that are H&R block [Tom interjects: I had that first date when I was a freshman in high school.] We're both lucky we are we continuously it lucky or is this going to work out?

Tom Stewart: But well let's not underestimate how smart these guys because they are often. I mean the middle. One of the things we know is that middle market businesses outperform big business and small business in terms of growth. So they have bunch of really sharp people, but they need the stuff. I mean I think about it, what our mission is helping create practical management insights in the written, in the native language of a midsize company. So you don't have to translate it from what works for IBM or what works for a startup. You say, this is actually about me and I can apply this pretty directly and when, when we're. When we're hitting a and we sometimes miss, but when we're hitting that, that's what I think that the National Center for the middle market can do.

Ryan Tansom: Well, can I give you a sweet analogy because I think you're right in that there's so much talent and so much smart tier. So here's, here's the analogy that I've gravitated towards where you got a golfer to golfers, potentially this. He got a golfer that is a scratch golfer and they're eight. I mean there's obviously still to be a scratch golfer. You're extremely talented, right? Like you're, you're killing it and everybody's trying to get to where you are. And I think a lot of the mid-market entrepreneurs are scratch golfers, but the difference between that and taking information that you're doing and then really getting to the next level is if you're a scratch golfer and you, you met, let's say you pull something and then there's wind and there's rain. Can do you know why you're a scratch golfer like cam adjust, do you know I can do this versus that, and then still be a scratch golfer in all the different conditions. The people that are the professionals or they're leveling up their game, they take the information, that data that you're doing to always be a scratch golfer, no matter what happens because they have like at least insight of if this changes, then that happens. So it's just it. Does that make sense?

Tom Stewart: It makes a lot of sense. I mean one of things that we learned in the growth study and it shows up again in our, in a study that we're doing on, on strategic planning on that, on that wow planning process stuff is that keeping up with the literature matters, you know? If you're working in the business, that's great, but you need to be working on the business and all of the data about markets and customers and all of the other stuff that you got there. It really helps to have a, I guess a framework or context which you helped me. Yeah. This is what it means and, and that sort of knowledge can help you put these pieces together so that I say, this is what I see, but this is what it means and therefore this is what I can to about it. And that's, that's exactly. Your scratch golfer thing is exactly right. I mean, you know, can I do it every day? Anybody, you know, I could pull a 300 game. You know, maybe once. Right. But can I bowl above 250 regularly? Likewise with golf. I mean, me at golf, I've played one, one round of golf in my life and, and uh, you know, but so that would be, I wouldn't be a scratch in the sense like a horse that gets scratched, please keep me out.

Tom Stewart: But yeah, it's that, it's that ability to, in businesses business to change sports metaphors. Business doesn't end after nine innings. It doesn't end after extra innings. Business doesn't end. So there's always another inning, there's always another quarter and, and you know, eventually maybe. Yeah. Eventually you sell a. eventually something happens to a business. Yeah. Hope you have to. You hope you can sell when you're at the top of your again, but basically there's always another quarter, there's always another year. And so to be able to say, I won the game today, that's great. Uh, or, or I, I had a great at bat. That's great, but what you really need is you need to that, that you need the capabilities and the consistency that to do it over and over and over again and to still find it refreshing and fun.

Ryan Tansom: Well said and I don't even know normally wrap up Tom with if there isn't anything, you know, we've touched on a lot and if there's something that you want to highlight or there's a big takeaway you want to leave the listeners, what would it be?

Tom Stewart: I think the takeaway would, what would be, uh, www.middlemarketcenter.org, first of all. But, you know, the, the other thing is, I, I, I think that what we were saying earlier about, you know, we can understand, uh, the drivers of growth. We can understand market conditions, we can understand the things that we need to do. But you also have to understand yourself personally and yourself organizationally, so knowing, you know, knowing who you are and when people talk about what success looks like, it's not just a bunch of numbers, success looks like this kind of being this kind of human being or this kind of corporate entity. And so I think that sense of what success looks like in that larger sense is something that can help companies and help executives make better decisions about how they're going to put there, their money, their talent, their people to work.

Ryan Tansom: So we have the website. And then is there any personal contact for you or just drive everybody to the website? What's the best way to get in touch with you?

Tom Stewart: Uh, you know, I'm also on Linkedin. It's Thomas j Stewart s, t e w, a r t on linkedin. And that's probably the easiest way to find me.

Ryan Tansom: Tom, thank you so much for coming on. I had an absolute blast.

Tom Stewart: Likewise. Thank you. This was, this was terrific. And, and, uh, at that, I'm really grateful for the opportunity.

Takeaways

Ryan Tansom: You probably could tell that I could've gone forever talking to Tom about the information and all I can think about is how I want to dissect all the different layers and look at all the different correlating factors because wow, the amount of information that he has and I highly suggest if there's one takeaway, go to the website, go to our show notes in this podcast, episode gexpcollaborative.com. Look at the podcast episode with Tom will have all the links to the surveys, the different studies, his website organization and everything, but if there's one big takeaway, it's the data that he's talking about is what you need to be paying attention to. Way more important than almost anything because when the time comes that you get the out of the blue offer or you're going to want to start putting together a plan to sell or you want to know your different options.

Ryan Tansom: That is the playbook. Those different factors on the seven different growth factors. Really identifying how you rate in those different areas. Understanding what type of entrepreneur you are, what type of entrepreneur that buyer potentially is, and then what are the different nine things or the things that you have to be cleaning up now to maximize the value and the outcome of what you're doing. It's the playbook, so if you take our process from the growth and exit planning collaborative process, layered in with his data, you have a playbook for the first time to go get what you want and have a reason to be focusing your energy on this. It's not just working on quote unquote the business without any real meaning behind that. So I hope you enjoyed this episode as much as I did. You can tell I was pretty passionate about it. Go onto our website, gexpcollaborative.com. We've got ultimate guides on knowing the business's value, the different exit options. Go dive into all the data that Tom has and if you have any questions, reach out to me and if you have any sort of time and we want to go do it, give me a rating on itunes or sharing this episode with a friend and with that I will see you next week.