What's wrong with Private Equity (PE) these days? With PE expert Lee McCabe, MBA

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Well, the road to success ain't always clear Thank you.
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Good afternoon and welcome to the Build Better Business Podcast.
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I'm Chuck Crumpton, and I'm honored to be your host
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during today's conversation. This is going to be a really
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good conversation today with my guest, Lee McCabe. I've had
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the privilege of building and selling three of my own
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companies from scratch, two from the tool shed of my garage,
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and I know business can be tough and lonely at times.
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That's why we create it. the Build Better Business podcast,
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and it's exploding. Thank you for listening. Thank you for
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being a part of this mission to bring good content
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to business owners and business leaders around the world. I
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work with business owners to get them the best price
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in terms when they sell their company. Don't leave money
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on the table when you sell. You've sacrificed too much
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and worked too hard to get a less than best offer.
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If you're thinking of selling, please reach out and let's chat.
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My direct line is 864-915-0066. I have two quick favors
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as we come on the air. Number one, if you
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would hit subscribe, it just allows you to stay abreast
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pops up and keeps the, uh, The cookies at eye level,
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you like the show, please consider leaving us a five-star review.
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And your review is really, really, really important. And if
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Call me and say, Chuck, this is a way to
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make it better. Because I can tell you, we're working
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our tails off to make this a fantastic business podcast
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for business owners and leaders. We'll be back with Lee
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in just a moment.
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From scaling up to exit dreams, culture, cash flow, winning teams.
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Hear the stories, learn the way to double your.
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Value and seize the day.
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Build better business, take that ride with Chuck Crumpton right
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by your side.
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Grow it strong.
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Oh yeah.
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Well, Lee McCabe, I'll tell you one thing. I wished
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I could play the guitar like that, my friend.
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Me too.
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We have a lot of fun with that. I had
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a guest on from London not too long ago, and
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as the song was playing and we were getting ready
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for our conversation, I look up on my screen and
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he is literally dancing around. He's got his hand in
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the air and He comes on to the conversation. He goes, Chuck,
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that is the best intro song I've ever heard in
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my entire life.
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It's pretty strong. I agree.
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Thank you, man. I appreciate that. He's voting for a Grammy.
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I don't know if we'll win it or not, but
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we certainly had a lot of fun writing it. If
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you're having a down day, if it's a low biorhythm
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day and you listen to that guitar, man, it gets
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you just fired up, doesn't it? you're coming um you're
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joining the conversation lee from uh los angeles we're talking
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a little bit about uh as we came on the
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air uh what a great place uh southern california a
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great place to to live right great weather great people
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great food.
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Uh it is waking up to sunshine every morning makes
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a big difference to your life it turns out oh yeah.
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I i don't meet a lot of people that are
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not happy in southern california because the sun's always shining
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and it's uh You know, it's just great weather. Yeah. Well,
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I wanted to say, and I want to jump into
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your background. And we work with a number of just
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fantastic people on our deal team. And when a buyer
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says we have a deal, you know better than anyone,
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that's only the beginning. The real work starts with protecting
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the interest, preserving value, and anticipating the All those issues
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that can derail a transaction, right? And a lot of
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things happen in the 11th hour. An experienced M &
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A attorney like Hal Cobb stands beside you through every negotiation,
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every document, every decision, so you can close with confidence
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and keep more of that hard-earned money that we've talked about.
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Give my friend Hal Cobb a call today, 843- 936-6680.
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Hal does a great job. And, you know, Lee, you've
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done a lot of deals in your career, and we're
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going to jump right into it. We're going to talk
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about some of those deals, not in anything that's confidential,
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but we're just going to talk about M & A
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in general, and we're going to get into some really
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good stuff. I do want to lay a background. You're
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obviously from Los Angeles. You live there. You got your
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MBA from Warwick Business School. and you're a partner with
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Claymore Partners, right? You've seen a lot of deals kind
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of flow down. First of all, welcome to the show, Lee.
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Really glad to have you. I think this is going
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to be a fantastic conversation. Thank you for being part
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of it.
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Thanks for having me.
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I'd like to get started with my guest. It's a
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bit unfair and it's a bit intrusive, but For us
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to know you and to like you, and I do already,
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by the way.
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Intrude away.
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I want my audience to know you.
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Yeah.
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Tell us as we get started, what is your what
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and what is your why? Some people define that as
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mission and purpose, but what do you do and why
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do you do it?
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Well, what I'm doing now is I'm building a private
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equity firm. So Playmore Partners ultimately will be a private
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equity firm. I worked in private equity and digital for
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a long time and just saw the opportunity to build
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better businesses. Right now, before we get to the funders,
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which is a few years out, we're an advisory firm
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for other private equity firms. So we help them fix
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their portfolio companies, help them realize revenue and drive change
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in their portfolio companies, really with a couple of levers,
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data and digital. And right now, I mean, every business
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should be data. It should be optimized via digital. But
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they're not. Most businesses are not. And it's a crazy opportunity.
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There's never been an easier time to build a business
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built on data or look at your existing business and
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create a data foundation. Because that ultimately will make your
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business much easier to manage. It will point to where
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the growth levers are in your business. It will point
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to the gaps in your business you need to fix.
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And if you're selling your business, you'll get a high multiple.
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Because when any firm or business is diligencing you, they'll
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have a lot of questions. And data solves arguments. There
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should be no good feel in your answers or guesswork
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in your answers. If you can answer everything with data
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and show a history of that data, you'll have a
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very clean company to sell.
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Yeah, totally agree, man. Totally agree. To that point, I'll
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try to keep my personal... anecdotal stories at, you know,
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at bay and, and, and not, you know, not, uh,
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not go too deep with my personal stories. But when
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I sold my second company, which was a healthcare business, uh,
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very successful, we had gone to, to become a global healthcare, uh,
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you know, company. We, uh, we looked at a lot
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of different, right. We had offers on the table. We
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had a broker that did a really good job and
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he brought me five LOIs. And I think four of
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the five, this is six years ago, And best I
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can remember, four of the five came out of, you know,
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from private equity, some smaller private equity firms, some that
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are more medium, larger. I went with the one, Lee,
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that was actually the second best price, but it was
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the best fit for my company and my culture. And
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the culture in my business was really, really important to
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me because, you know, You know, some of these folks,
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and you know this, right? Some of these people, they
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had given everything to me. They had sacrificed. many times,
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personally sacrificed for my benefit and the benefit of the business.
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So I was looking out for my people and the
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culture was really, really important. So I chose the private
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equity firm that I felt was the best to fit culturally.
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By the way, Chuck was taken care of and I
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got a lot of nice zeros and all of that
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stuff was good. But, you know, it was a good fit.
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But that's not always the case with private equity. And
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I'm really drawn to this conversation, Lee, today because I've
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got a lot of clients that are listening. They're taking
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the calls from private equity firms, right?
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Right.
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There's a lot of roll-ups. And we get today in
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the conversation between with Chuck and Lee, we get to
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kind of peek under the tent to pull back the curtain.
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And I'm drawn to some of your statements that you've
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made about private equity being broken and private equity needs
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to be fixed. We could probably spend three hours on that, right?
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But I think for the people listening to us, sometimes
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they hear the horror stories with private equity, either on
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the front end of trying to get the deal done
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or three to five years after the deal is done
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when things go south, right? So I want to peel
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back that onion because I think you have, you've stirred
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up some stew, as we say in the south, right?
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You've stirred it up, you've mixed it up, you've made
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comments about private equity in particular. that I think, number one,
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are refreshing. And I think you're bringing a fresh, new
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approach to private equity, because there are parts of private
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equity that are broken, clearly.
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Yeah. Yeah. Yeah. Look, I love private equity. I wouldn't
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be working in this industry. But there's a clear need
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for change for a few reasons. I think most people
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admit this. Private equity has been like shooting fish in
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a barrel for the past 20 years for two main reasons.
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If you have low interest rates, that's beautiful for any
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business in finance, especially private equity. And if the market
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keeps rerating the assets every four years, you're almost guaranteed
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a higher multiple than what you bought for. So that's
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why PE firms were... enabled for a long time to
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buy a good business, cross their fingers and put in
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a good leadership team. And all they had to do
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was be good governors. So what I mean by that
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is all they had to do was make sure they
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had the quarterly board meeting and they were keeping everything
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on track. And then nine times out of 10, they
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would sell that business for a very good profit four
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years later. Now, unfortunately, the wind has changed because interest
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rates are not low anymore. We'll see what happens with those,
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but they're not going to go back to what they
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were anytime soon. And the market is not rewriting the assets.
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The last vintage is a dumpster fire because everyone paid
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too high in terms of multiples. You're not going to
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get a higher multiple for most of these assets that
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the P is sitting on right now. And that's why
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it's ground to a halt because there's 33,000 businesses, like
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3 trillion assets that they can't sell because they're not
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going to make a profit on them. So private equity
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has to be more operationally focused. If you can't rely
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on low interest rates, And you can't rely on just
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getting a high multiple. You have to actually create value
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in business. Just like we try to do forever. You
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have to create value in the business and you have
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to do it from day one. That's the only guaranteed
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way you're going to make money from these businesses by
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getting in and getting your hands dirty and creating value.
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And PE firms have not been set up for that
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because they've never had to be.
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You've made... You've made some eye-opening statements on LinkedIn or
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your website or whatever. I want to unpack a couple
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of those quotes from you, my friend. You said, and
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I quote you, private equity is shifting from capital deployment
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to capability deployment.
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Yeah.
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Unpack that.
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Yeah, so like I said, to add value.
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You have to be capable of knowing what you need
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to do to add value. So you can't be hands-off
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on these companies. You have to go in on day one.
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You can't cross your fingers and hope the CEO gets
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it by year three and then you discover they haven't.
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You have to go in and understand the data and
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understand the business drivers. You have to understand how this
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business has been making money. You have to understand how
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the world is changing. What implications do AI bring to
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this business? What implications does other technologies bring to this business?
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Is it going to be a threat? Is it going
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to be opportunity? If it's a threat, how do you
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build a moat? How do you stop that from being
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a threat if you can? If it's an opportunity, great.
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How do you double down that opportunity? How do you
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identify exactly what that opportunity is and race towards it
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as fast as possible? So, yeah, that's what I meant
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by that. You have to be capable. You can't just
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stand back and hope the business does well. You have
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to get in and fix the businesses in most cases,
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fix the businesses and enable these businesses for growth. So
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you can see a good exit in four years. Right now,
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it's nearly eight years because of the problems private equity
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is having. But ideally, you'd want to exit in four
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to five years. You can only deal with that by
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getting your hands dirty from day one and operationalizing these businesses.
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You're bringing what I call disruption, right? You're shaking it
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up a little bit, which I love. I grew up...
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My mom and dad taught me phenomenal work ethic. And
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my dad's philosophy was, if it ain't broke, break it
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because it can be better. So in a sense, you're
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breaking this industry that's got some flaws. And another quote
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you said, and I really like this. I want to
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know what you meant by it. You said, business isn't
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about the party you're in. It's about finding the other room.
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What do you mean by that?
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Yes, I think that there's always another room that you're
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aware of. So it's about what you just said. It's
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about test and learn. It's about testing, learning. Don't take
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things for granted. A lot of businesses take things for
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granted and they say, well, this is my business. I
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know the market. I know my buyers. I know the sellers.
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This is the business I'm in. And they stop testing
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and learning. And you should always live in beta. You know,
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the world is changing that fast. There are always new
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opportunities for you to find. You've just got to be
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bold and go after them and have that test and
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learn mentality. The other room is something you probably hadn't considered.
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You know, it's like the analogy is Vegas, right? You
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go to an amazing club, an amazing bar. Are you
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still there? You're thinking, wow, this is amazing. Then you
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find out there are 20 guys in another room in Vegas.
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that takes the party to a whole new level. So
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that's when you go, shit, how did they get in
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that other room? They're doing something different to me. One,
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to have found that other room, but also just to
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be invited to that other room. So if you have
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that mentality that there is always another room, no matter
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what you're doing, there's somewhere else that's better you can
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go to. And that is a test and learn mentality.
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By testing, learning everything, by having the confidence to get
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over cringe mountain. Like a lot of these things you
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should do, you may be apprehensive about. Like building a
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profile on social media. A lot of people are apprehensive
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about that, but the opportunities that brings you are immense.
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You know, there's never been an easier time to build
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a personal brand for yourself. There's never been an easier
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time to build a massive audience for yourself. I've done
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that firsthand and seen it, but you have to kind
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of say, get over Cringe Mountain and say, I'm going
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to speak my mind, which is what I do in
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all my posts. I'm just going to say what I think.
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And look, I might offend a few people. That's fine.
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You can't be liked by everybody. But if most people
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agree with what you're saying, it's funny. I get a
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lot of messages from people who can't publicly comment that say, yeah,
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what you're saying is exactly right. More people should be
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saying this. And that gets you a bigger audience by
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being authentic, by being provocative and pointing out pointing out
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failures and pointing out gaps that everybody knows, but they're
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not talking about. Yeah.
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Yeah.
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That's how you build an audience. That's how you find
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these other rooms. Yeah.
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That's good. I love that, man. Why do you think Lee, I,
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you know, I go back to again, my second exit
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with this wonderful experience. And again, six years ago, those
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guys have become friends of mine post-close, right? They, they
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did everything they said they would do. They've done it with,
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They've done it with integrity. So kudos to those guys.
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They're good guys, right?
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They've done a good job. Not always the case with
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companies that sell to private equity. As you diagnose this, again,
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I love your... I want to be PG in my statement.
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I love your moxie. I'll clean it up a little bit.
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I love your moxie that you are bringing truth in
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a real and raw way to this industry. But why
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is it, you know, my experience was great on my side, right?
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And again, they've handled themselves beautifully for my people, which
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is my biggest concern. And they've done a good job,
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I hope, because I still own a portion of the company.
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I hope like hell they grow that to, you know,
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to $ 100 million business. But why does it break down
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when private equity takes over? And we're going to talk about,
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we're going to really get into the weeds on that.
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But when private equity takes over a deal and it's
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the next day, it's the first day of the new
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world order, so to speak. And some private equity firms
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do it really well. Like in my case, I was
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the benefactor of, you know, doing it very, very well.
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But I've seen it, you know, not so well, done terribly.
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Yeah.
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Is it, just diagnose it quickly, Lee. Is it a
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problem of, is it a competency problem? Is it a
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character problem? In other words, are they just too damn lazy?
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to roll up their sleeves and get their hands dirty?
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Do they not understand the business? Do they have too
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many irons in the fire? What's the biggest thing that
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just breaks in that process?
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I think it's all about judgment and this is just life, right?
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No matter if you're talking about companies or people, you'll
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find good actors, you'll find great actors, you'll find bad actors,
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you'll find terrible actors. You can apply to the people.
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When you're hiring people, it's the hardest thing in the world.
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You will get people who ace the interviews. You think,
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I'm going to get a superstar here. But you never
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know until you work with them for three months. And
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three months in, you go, shit, how did I not
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see that? They're the worst hire I could have made.
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They bluffed me in the interview. How did I not
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read that? Shame on me. And then conversely, you know,
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I've made hires where I thought this guy is going
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to scrape in. I'll give him a go. I think
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he's going to be average, but that's fine. He turns
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out to be a superstar. I think that's the same
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for companies, especially in the diligence process. And any company
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working with PE firm, diligence is obviously both ways. It
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should be diligence in that firm like crazy and getting
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as good a feel as you can for that firm.
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Look at their history. Speak to portfolio companies that they've had.
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Speak to portfolio companies they've been successful with. Even better,
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speak to portfolio companies they haven't been successful with. And
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that's another good read on a firm because it's like
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getting references in an interview. They'll always give you the
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best ones. You can really tell a firm by saying,
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you will definitely have some companies that haven't worked out.
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I want to speak to those guys. And if that
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firm is transparent, they will say, You should, fine. Speak
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to these guys as well. So the importance of the
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diligence on both sides is probably more important on the
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company that's selling the private equity. Because you've got, what,
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three months to get as good feel as possible, whether
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these guys are going to be great partners for me
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over the next four years. And then if you do
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that diligence, it's not always going to be perfect. You
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should have a high degree of confidence that you've backed
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the right horse and you've picked the right buy for
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your business. But again, like hiring people, You'll never know
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until the first three months. Then you can say, oh,
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I made a good bet. Or you may say, man, yeah,
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I didn't make a good bet. But there's no way
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of knowing until you're actually in bed with them. And
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three months in, then you can make an accurate call
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whether it was a good bet or not. Yeah.
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There's something, I hate to use the word magical, but
393
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there's a secret to that sauce. when you're in, and
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I'm putting my business owner hat on for a moment,
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because a lot of our listeners are, they're in some
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degree of selling their business, maybe a year or five years.
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But it's important to write to your point to get
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to know, you know, again, my PE firm that bought me,
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you know, they came, flew in during COVID. We had
400
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to sit, you know, 10 feet apart. But we broke bread.
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We drank wine. We talked about our families. We got
402
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to know each other separate, away from the numbers. I mean,
403
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the data was good. Our numbers were great. And our
404
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books were clean. We had a very efficient war room
405
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in terms of response to their due diligence requests. But
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we had to get to know those guys, right? We
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had to break bread. We had to spend some time
408
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eating and drinking together. So that we could see the warts.
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We all have warts, right?
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Yeah.
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And those guys are not perfect. You guys are not perfect.
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We're certainly not perfect. But the more that you can
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get beyond the numbers and really understand the head and
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the heart of a PE firm, the better decision you
415
00:25:10.049 --> 00:25:10.660
can make, right?
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Yeah.
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And that's the other thing that's broken in private equity.
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Because if you ask most founders now, which PE firm
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would you like to buy you? They've probably only heard
420
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of five. They'd probably say KKR, Blackstone, Carlyle, Apollo. It's
421
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not going to be those firms that are going to
422
00:25:29.849 --> 00:25:32.609
buy you. So you end up with a dance with
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five firms you've never heard of before. And the thing
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that's broken about that is private equity have never been
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good at communicating. That's why you only hear the bad
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stories because that's what gets the most news. You never
427
00:25:45.549 --> 00:25:48.500
hear the good stories of private equity. When you look
428
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at a PE firm's website, you could take the logo off.
429
00:25:52.109 --> 00:25:55.190
Every website would look the same. Every website would look
430
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the same because they're a pitch deck for LPs. It's
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all about how successful this firm has been to raise
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more money. There should be a pitch deck for founders.
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If they did that, if they said, look, we're a
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half investment firm, half media firm, and we're going to
435
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have podcasts. So you know the firm very well. We're
436
00:26:16.190 --> 00:26:18.670
going to have interviews with the partners. So you can
437
00:26:18.710 --> 00:26:20.250
listen to what they say. You can get a feel
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for how good or bad our partners are. We're going
439
00:26:23.269 --> 00:26:25.730
to give you insights to our deals. We're going to
440
00:26:25.769 --> 00:26:27.609
tell you what worked. We're going to tell you what
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didn't work, even more importantly. We're going to share the
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secret sauce. Because truthfully, there's no secret sauce in private equity.
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How you build a business 20 years ago is how
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you build a business today. So if they were transparent,
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they got ahead of that. And the VCs are good
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00:26:41.569 --> 00:26:45.039
at this, particularly Andreese. If they got ahead of that
447
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and said, the website is for founders, it's to attract founders. One,
448
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you will improve deal flow and you should improve your
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trust ahead of any deals. Because if you've been reading
450
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the five companies that you danced with before you chose one,
451
00:27:00.769 --> 00:27:02.569
if you'd have been reading them on LinkedIn for the
452
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past five years, if you'd have been listening to their podcasts,
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if you'd have been learning about what they do to
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make themselves great partners, to make themselves great business builders,
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you would feel like you already knew them. And that
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would have made that dance a lot easier and probably
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your decision a lot easier. So that's a little big
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mess in private equity right now.
459
00:27:21.039 --> 00:27:24.539
Yeah. Yeah, that's a great point, man. That's a great point.
460
00:27:25.240 --> 00:27:29.420
Speaking of deal flow, and again, Lee, this is going
461
00:27:29.440 --> 00:27:32.200
to be a very unfair question. So buckle up and
462
00:27:32.259 --> 00:27:36.559
bear with me. You've seen a lot of deals. You've
463
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been involved in a lot of deals. What's that one
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decision that you've watched an owner make, let's say during
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the transactions? that cost them a lot of money, in
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some cases, perhaps millions. What should have they done differently
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in that process?
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Well, look, I've been fortunate to work with great firms, right?
469
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So I can't give you first-hand experience of that. It's
470
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all down to picking the right partner. Because if you
471
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pick the right partner, you know that you're not going
472
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to get fleeced. There's going to be no hidden clauses
473
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on page 36 that you might have missed. It's in
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the PE firm's best interest to make you as successful
475
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as the PE firm is going to be on this investment.
476
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So it's all down to picking the partner to begin with.
477
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Because like you said, you had a great experience because
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whoever you picked were great partners. And it was truly
479
00:28:33.240 --> 00:28:36.119
a partnership. And if you look at it like that,
480
00:28:36.319 --> 00:28:40.140
everybody makes money out of that. You probably rolled some
481
00:28:40.180 --> 00:28:44.579
equity into it like everyone does. And the second bite,
482
00:28:44.619 --> 00:28:48.220
you might have made even more. That's what good looks like.
483
00:28:49.039 --> 00:28:53.170
So yeah, it's about picking the right partner. I don't
484
00:28:53.210 --> 00:28:55.710
have firsthand experience of where an owner might have signed
485
00:28:55.730 --> 00:28:59.890
something they shouldn't have or missed a clause that the
486
00:28:59.930 --> 00:29:03.650
PE firm stuck in there because fortunately, I've only had
487
00:29:04.910 --> 00:29:07.910
the great fortune of working with good firms. But yes,
488
00:29:07.950 --> 00:29:09.670
there are bad actors out there.
489
00:29:10.529 --> 00:29:15.329
For sure. And I think a lot of people... they
490
00:29:15.450 --> 00:29:19.230
view this dance. You referred to the process as a dance,
491
00:29:19.250 --> 00:29:23.309
which I think is a really good analogy, good metaphor, right?
492
00:29:23.930 --> 00:29:26.349
It's a dance and you're getting, you know, both parties
493
00:29:26.390 --> 00:29:28.990
are getting to know each other. You're working through due diligence.
494
00:29:29.410 --> 00:29:33.170
You've got assigned LOI. So you're, you know, they're in
495
00:29:33.210 --> 00:29:36.829
your underwear drawer and hopefully you're asking the questions back
496
00:29:36.869 --> 00:29:40.509
so you can craft what you think is the best
497
00:29:40.569 --> 00:29:46.630
decision possible but it's it's interesting that a lot of
498
00:29:46.670 --> 00:29:51.099
people think of this process as being mysterious and it
499
00:29:51.339 --> 00:29:54.420
really whether you're selling your business for a hundred thousand
500
00:29:54.480 --> 00:30:00.049
or a hundred million the process is very similar And philosophically,
501
00:30:00.170 --> 00:30:04.930
it's very much the same, right? You're looking for good deals.
502
00:30:05.430 --> 00:30:09.369
You're looking for a good partner. You're looking for a win-win.
503
00:30:09.450 --> 00:30:13.210
I know that's overused, right? It's an overused cliche, but
504
00:30:13.289 --> 00:30:16.329
we want, and when I broker a deal, when I
505
00:30:16.369 --> 00:30:19.210
work with a seller or whatever, I'm looking for a
506
00:30:19.390 --> 00:30:23.119
good partner as part of my representation on that deal team.
507
00:30:23.640 --> 00:30:27.119
I'm looking for a good partner that embraces that philosophy
508
00:30:27.160 --> 00:30:31.359
of win-win. Charlie Hauser, one of my mentors from 40
509
00:30:31.359 --> 00:30:35.829
years ago, told me as a young executive, he said, Chuck,
510
00:30:36.710 --> 00:30:41.490
it is not a good deal if both parties don't win, right?
511
00:30:42.069 --> 00:30:48.210
So this is a philosophical point in the discussion. We
512
00:30:48.250 --> 00:30:50.250
want a good deal between the buyer and the seller.
513
00:30:51.009 --> 00:30:53.809
I want my sellers five years from now to see
514
00:30:53.869 --> 00:30:58.339
their partner, their buyer on the street, slap a high five,
515
00:30:58.750 --> 00:31:01.349
you know, have a beer and say, man, this has
516
00:31:01.430 --> 00:31:04.710
been great. You know, I've been perfect. It's not a
517
00:31:04.750 --> 00:31:07.930
perfect path, but this has been a good partnership, right?
518
00:31:10.490 --> 00:31:13.549
Yes, exactly. If it's not a win-win, don't do the deal.
519
00:31:13.869 --> 00:31:14.809
Yeah, don't do it.
520
00:31:14.829 --> 00:31:19.130
That should be kind of common sense, table stakes, right?
521
00:31:19.190 --> 00:31:21.089
You shouldn't be pressured to do any deal. It's not
522
00:31:21.130 --> 00:31:24.660
a win-win. Yeah, yeah. You have options and you have choices.
523
00:31:25.059 --> 00:31:25.940
Yeah, yeah.
524
00:31:27.109 --> 00:31:30.009
Yeah, and, you know, to your point there, I think,
525
00:31:30.730 --> 00:31:33.089
you know, this is not a commercial, but, you know,
526
00:31:33.190 --> 00:31:35.660
working with a good deal team, a good broker, a
527
00:31:36.230 --> 00:31:38.839
good M & A attorney, we talked about that kind
528
00:31:38.880 --> 00:31:42.920
of stuff. But, you know, have multiple offers. I was
529
00:31:42.980 --> 00:31:46.980
just counseling an intern of mine, and I said, when
530
00:31:47.000 --> 00:31:49.799
you're looking in the job market, talk to a lot
531
00:31:49.819 --> 00:31:51.759
of people. Get a lot of irons in the fire
532
00:31:52.200 --> 00:31:56.460
so you've got options. Options are wonderful. You know, I
533
00:31:56.519 --> 00:32:00.539
had five LOIs. Some people have two. Some people have 10.
534
00:32:00.539 --> 00:32:03.859
But options give you a lot more freedom and flexibility
535
00:32:03.940 --> 00:32:07.410
to make that right decision when it comes down to
536
00:32:07.910 --> 00:32:11.869
the LOI and then entering into due diligence ultimately to
537
00:32:11.910 --> 00:32:13.130
get that purchase agreement, right?
538
00:32:14.890 --> 00:32:18.950
Exactly. Look, on the seller side, I think the most
539
00:32:19.029 --> 00:32:24.380
important things are transparency and trust. Like if you can,
540
00:32:24.880 --> 00:32:28.819
whether it be direct or hand-in-hand with your broker, if
541
00:32:28.880 --> 00:32:32.059
you can demonstrate you are as transparent as possible by
542
00:32:32.119 --> 00:32:35.359
laying out, here's my business. Here's what's great about it.
543
00:32:36.160 --> 00:32:38.769
Here's what's good about the macro, because that's a big driver.
544
00:32:38.789 --> 00:32:43.150
If the macro is doing well, awesome. Here's about my people.
545
00:32:43.170 --> 00:32:46.269
Here are my numbers. If you lay that out so
546
00:32:46.869 --> 00:32:49.390
it can't be refuted, and if it's all based on data,
547
00:32:49.829 --> 00:32:53.170
it should be fairly straightforward. But if you're also transparent
548
00:32:53.190 --> 00:32:56.009
about what's not working and where you might need help
549
00:32:56.390 --> 00:32:58.710
and what hasn't worked and some things you haven't figured out,
550
00:32:59.410 --> 00:33:01.470
that builds a trust. It builds a trust with the
551
00:33:01.509 --> 00:33:06.849
PE firm. Because there's nothing worse than when your company
552
00:33:06.869 --> 00:33:10.609
gets bought and the buyer is surprised on day one
553
00:33:11.170 --> 00:33:14.539
by something you haven't disclosed or maybe something that's down
554
00:33:14.599 --> 00:33:17.430
on them, maybe something they didn't ask. But that's the
555
00:33:17.470 --> 00:33:20.160
worst thing that can happen if the buyer gets surprises
556
00:33:20.240 --> 00:33:25.019
or sometimes shocks. In the first week of that whole period.
557
00:33:26.720 --> 00:33:32.140
I had a client in my prior life that it
558
00:33:32.180 --> 00:33:36.940
was in the healthcare space and this was essentially a
559
00:33:37.079 --> 00:33:40.240
merger it was an acquisition but they called it a
560
00:33:40.259 --> 00:33:46.829
merger between sort of two equal parts. They both company
561
00:33:47.529 --> 00:33:49.880
of course I won't mention the companies but You know,
562
00:33:49.920 --> 00:33:54.619
they were both multi-billion dollar businesses, and they were about
563
00:33:54.680 --> 00:33:59.220
the same size in revenue. I get a call, and
564
00:33:59.279 --> 00:34:02.720
because a lot of our work was in the compliance
565
00:34:02.809 --> 00:34:06.509
regulatory space, right, in healthcare, I get a call on
566
00:34:06.690 --> 00:34:10.690
day one of the New World Order, the day after
567
00:34:11.469 --> 00:34:18.360
the ink was dry, and from my client, who says, Chuck,
568
00:34:19.030 --> 00:34:24.210
we just found a big problem. And the problem, because
569
00:34:24.269 --> 00:34:29.469
this was an FDA regulated space, the big problem was
570
00:34:29.489 --> 00:34:33.710
the day after the close, guess who was knocking on
571
00:34:33.730 --> 00:34:41.199
the door? FDA. And they uncovered all kinds of just
572
00:34:41.449 --> 00:34:49.460
junk under the hood. And this was, again, in excess
573
00:34:49.500 --> 00:34:54.320
of $ 2 billion on the acquisition. So you take that math,
574
00:34:54.380 --> 00:34:58.219
those zeros, and apply it to this major FDA issue.
575
00:34:59.059 --> 00:35:02.199
We've got a big problem. And my contact, who was
576
00:35:02.260 --> 00:35:05.639
a board member, said, Chuck, we've got a big old problem.
577
00:35:06.099 --> 00:35:07.920
I don't know. We need help. We've got to get
578
00:35:07.960 --> 00:35:11.699
this thing fixed. We have so much exposure. And my
579
00:35:11.969 --> 00:35:15.269
client was the buyer, right? But there was so much
580
00:35:15.349 --> 00:35:22.489
exposure because they didn't know. Due diligence was not thorough enough.
581
00:35:23.010 --> 00:35:26.570
They didn't know the pending knock on the door from
582
00:35:26.610 --> 00:35:30.619
a federal agency. And consequently, you know, we worked through
583
00:35:30.639 --> 00:35:35.000
them and it was profitable for my company. But, you know,
584
00:35:35.119 --> 00:35:39.000
it took a couple hundred million dollars of remediation work
585
00:35:39.679 --> 00:35:44.019
to get them back to a healthy standing. And that's,
586
00:35:44.360 --> 00:35:47.800
that's a, boy, you talking about a tough pill to swallow.
587
00:35:48.099 --> 00:35:49.900
That is a tough pill to swallow.
588
00:35:50.400 --> 00:35:50.599
Yeah.
589
00:35:50.619 --> 00:35:52.860
And you don't recover from that. I mean, no matter
590
00:35:53.719 --> 00:35:58.760
how good the PE firm is and how, how, how
591
00:35:59.489 --> 00:36:01.739
much of a good guy or good firm they are,
592
00:36:02.699 --> 00:36:05.469
if you lose trust day one and they say you
593
00:36:05.510 --> 00:36:08.989
haven't disclosed something you should have, that's never going to
594
00:36:09.010 --> 00:36:11.110
be a good relationship because it's, you can't win it back.
595
00:36:11.570 --> 00:36:14.239
You're done at that point. Yeah. But let's face it,
596
00:36:14.239 --> 00:36:15.820
you're probably not going to be around for much longer.
597
00:36:16.099 --> 00:36:23.130
Yeah, yeah. I've got, this is going to sound crazy,
598
00:36:23.409 --> 00:36:24.909
and you're going to break out in a sweat, Lee,
599
00:36:24.929 --> 00:36:29.110
but I've got 10 questions, and time will fail us
600
00:36:29.170 --> 00:36:30.829
because there's no way I can get all 10 of
601
00:36:30.869 --> 00:36:31.559
my questions for you.
602
00:36:31.570 --> 00:36:32.610
All right, well, let's be quick.
603
00:36:32.849 --> 00:36:33.780
Okay.
604
00:36:33.860 --> 00:36:35.019
Let's be efficient, fire away.
605
00:36:35.239 --> 00:36:37.179
Okay, when we come back, I'm going to hit you
606
00:36:37.219 --> 00:36:39.639
with the first one, and we'll do it in sort
607
00:36:39.679 --> 00:36:43.179
of a rapid fire approach. So hang on, we'll be
608
00:36:43.199 --> 00:36:43.579
right back.
609
00:36:44.260 --> 00:36:46.380
Chuck is very excited to work with you if your
610
00:36:46.440 --> 00:36:51.039
company or organisation needs a professional public speaker. His expertise
611
00:36:51.099 --> 00:36:53.880
includes over 30 years of speaking as a keynote, as
612
00:36:53.920 --> 00:36:57.239
well as large workshops and panels. He is an author
613
00:36:57.320 --> 00:37:01.280
and featured speaker for Johnson & Johnson, Abbott, Becton Dickinson
614
00:37:01.469 --> 00:37:05.489
and multiple other industries in the US, Canada, Europe and Asia.
615
00:37:06.110 --> 00:37:10.329
More information about topics and pricing can be found at chuckcrompton.com.
616
00:37:18.239 --> 00:37:21.519
Michael Mayhew joins the podcast today as a partner with
617
00:37:21.659 --> 00:37:27.320
Harris Harvey Neal and Company. As my personal CPA, I
618
00:37:27.420 --> 00:37:30.699
trust him completely. Michael, I want to thank you for
619
00:37:30.739 --> 00:37:33.260
the great work that you're doing for my family.
620
00:37:34.780 --> 00:37:35.329
Thanks, Chuck.
621
00:37:35.389 --> 00:37:38.090
This is shaping up really to be a great year
622
00:37:38.190 --> 00:37:42.369
for our firm and our clients. One of our main
623
00:37:42.469 --> 00:37:46.949
focal points this year is helping our clients defer or
624
00:37:47.050 --> 00:37:51.360
eliminate Capital gains tax when selling their business or their
625
00:37:51.400 --> 00:37:56.719
real estate and properly planning to reduce, defer, and potentially
626
00:37:56.780 --> 00:38:01.340
eliminate the tax on capital gains is huge. This preserves
627
00:38:01.440 --> 00:38:05.679
more of their hard-earned money at closing and really fuels
628
00:38:05.800 --> 00:38:08.019
that growth of that money in retirement.
629
00:38:08.780 --> 00:38:11.599
Michael, let me ask you, for folks in the process
630
00:38:11.659 --> 00:38:13.800
of selling their business, and a lot of our listeners
631
00:38:13.900 --> 00:38:17.260
are right now, they're thinking about it. What next steps
632
00:38:17.619 --> 00:38:18.260
should they take?
633
00:38:19.480 --> 00:38:22.449
Well, that's a good question. And number one, they need
634
00:38:22.469 --> 00:38:27.389
to start planning early. Don't plan after the fact. Number two,
635
00:38:27.989 --> 00:38:30.590
they need to have a game plan in place before
636
00:38:30.989 --> 00:38:35.469
they sell. Work with me to estimate the company's value
637
00:38:35.730 --> 00:38:39.789
and decide how to structure the sale for tax savings purposes.
638
00:38:40.369 --> 00:38:43.670
And number three, just reach out and contact me. My
639
00:38:43.710 --> 00:38:49.360
number is 434- seven, nine, two, three, two, two, zero.
640
00:38:49.800 --> 00:38:53.099
Contact me for any questions or any help. And again,
641
00:38:53.119 --> 00:38:58.079
that number is four, three, four, seven, nine, two, three, two, two, zero.
642
00:38:58.900 --> 00:39:02.539
Michael, thank you. And keep up the good work, man.
643
00:39:02.619 --> 00:39:06.860
Hope you have a great year. Thanks, Chuck. Thanks, Michael.
644
00:39:07.000 --> 00:39:15.480
Michael Lee does such a prevent me from giving some
645
00:39:16.019 --> 00:39:18.539
hardcore facts of how much he's made a difference but
646
00:39:18.960 --> 00:39:22.050
I can tell you in that wonderful relationship that I
647
00:39:22.090 --> 00:39:27.989
have with Michael it's so predicated on trust right which
648
00:39:28.829 --> 00:39:31.840
is a wonderful segue It's really what we're talking about.
649
00:39:32.619 --> 00:39:36.719
You're the buyer. You have a private equity firm. You've
650
00:39:36.760 --> 00:39:39.789
got to trust that what you're buying for your firm
651
00:39:40.429 --> 00:39:43.070
as a steward of your firm, right? You're protecting your
652
00:39:43.130 --> 00:39:47.610
firm's value. You have stakeholders. That there is trust in
653
00:39:47.670 --> 00:39:51.530
that seller, right? And then the seller has to, in turn,
654
00:39:51.690 --> 00:39:55.309
trust you as their partner to make sure we have
655
00:39:55.349 --> 00:39:57.769
a good relationship and we have a partnership that can
656
00:39:58.309 --> 00:40:00.869
not only survive, but thrive, right?
657
00:40:01.530 --> 00:40:02.769
Yeah, exactly.
658
00:40:04.090 --> 00:40:06.800
So question number one of my 10.
659
00:40:06.800 --> 00:40:07.110
Yeah.
660
00:40:07.409 --> 00:40:11.679
Rapid fire. So unfair. Forgive me. But you've said before
661
00:40:11.719 --> 00:40:14.880
in some of your writings, private equity, PE, is full
662
00:40:14.920 --> 00:40:21.289
of buyers pretending to be builders, right? My question is
663
00:40:21.389 --> 00:40:26.110
what separates the private equity firms that actually can build
664
00:40:26.869 --> 00:40:31.469
businesses from those who are simply stroking a check.
665
00:40:31.230 --> 00:40:37.090
And buying them? They have a culture of building, not
666
00:40:37.159 --> 00:40:40.840
just buying. And they have an operational team that has
667
00:40:40.880 --> 00:40:46.389
the power to make a difference in the portfolio. and
668
00:40:46.610 --> 00:40:49.889
has the power to partner with the CEOs and be
669
00:40:50.030 --> 00:40:52.690
good partners. And I don't think there are many PE
670
00:40:52.730 --> 00:40:55.889
firms like that at the moment. But everything we laid
671
00:40:55.989 --> 00:40:58.659
out earlier, PE firms have to change. I think they're
672
00:40:58.699 --> 00:41:02.719
slowly changing because they're realizing there has to be operational
673
00:41:02.760 --> 00:41:05.559
value creation or they're not going to get the investment
674
00:41:05.599 --> 00:41:08.550
back for a lot of these companies they're putting money into.
675
00:41:08.949 --> 00:41:12.329
Yeah, for sure. Part of that, and again, that's a
676
00:41:12.760 --> 00:41:14.980
I think you're reading my notes, but a segue to
677
00:41:15.000 --> 00:41:18.130
my next question real quick is you argue that the
678
00:41:18.349 --> 00:41:22.789
era of relying on cheap debt and multiple expansion is ending, right?
679
00:41:23.230 --> 00:41:23.690
Yes, go on.
680
00:41:24.170 --> 00:41:27.409
If financial engineering isn't going to create the returns it
681
00:41:27.570 --> 00:41:30.610
once did, I think you mentioned 10 to 20 years ago,
682
00:41:31.760 --> 00:41:35.699
where will the next generation of private equity returns actually
683
00:41:35.920 --> 00:41:37.699
come from? Is it from the build?
684
00:41:37.719 --> 00:41:40.239
It has to be. It has to be. If you
685
00:41:40.260 --> 00:41:44.739
can't rely on financial engineering... You can't rely on leverage
686
00:41:44.820 --> 00:41:48.500
and multiple arbitrage, and you can't rely on cheap debt.
687
00:41:49.440 --> 00:41:51.699
Then we're back to basics of how do you realize
688
00:41:51.760 --> 00:41:55.090
value in a business? You have to create value in
689
00:41:55.130 --> 00:41:58.489
that business. You have to be great builders. Yeah.
690
00:41:59.909 --> 00:42:04.230
Completely agree, man. You've seen a lot of deals. We
691
00:42:04.250 --> 00:42:07.489
just had a deal. Again, I was on the advisor
692
00:42:07.510 --> 00:42:13.199
on the deal team, $ 40 million deal. construction business, right?
693
00:42:14.440 --> 00:42:17.480
We typically play in that lower middle market, you know,
694
00:42:17.500 --> 00:42:20.360
a million to 50 million. This was a $ 40 million deal,
695
00:42:20.400 --> 00:42:23.559
but let's just say you walk in the door and
696
00:42:23.780 --> 00:42:28.230
you're obviously the, the acquirer and you walk into a
697
00:42:28.210 --> 00:42:34.050
$ 20 million business, which is squarely in our wheelhouse, right? That's,
698
00:42:34.210 --> 00:42:38.849
that's my second house that I play in. What, if
699
00:42:38.889 --> 00:42:42.719
you walked in the door, $ 20 million business, business up
700
00:42:42.780 --> 00:42:47.159
for sale, what would you see right off the bat
701
00:42:47.940 --> 00:42:53.289
that tells you there is untapped value, right? So in
702
00:42:53.329 --> 00:42:55.929
other words, I go back to the story on the
703
00:42:55.949 --> 00:43:00.369
deal team, $ 40 million, wonderful acquisition, took forever to close,
704
00:43:00.510 --> 00:43:05.099
but that was neither here nor there. But obviously the
705
00:43:05.260 --> 00:43:09.750
private equity that bought this client of mine, they saw
706
00:43:09.769 --> 00:43:14.730
a ton of untapped value. How do you see that quickly?
707
00:43:15.409 --> 00:43:18.630
Because that's part of your value prop, right? You've got
708
00:43:18.670 --> 00:43:22.650
to see there's money left on the table. There's untapped value.
709
00:43:22.889 --> 00:43:24.010
How do you recognize that?
710
00:43:25.469 --> 00:43:29.250
There's only two things that matter, data and people. If
711
00:43:29.289 --> 00:43:31.849
you have all the data, and I believe it's accurate,
712
00:43:32.349 --> 00:43:34.050
I'll test that it's accurate, but if you've got all
713
00:43:34.070 --> 00:43:36.670
the data and you show me there's one source of
714
00:43:36.730 --> 00:43:38.960
truth you've done a good job building a business built
715
00:43:39.019 --> 00:43:41.519
on data, then you should be able to communicate with
716
00:43:41.539 --> 00:43:45.360
me pretty effectively. One, how you've grown a business to
717
00:43:45.409 --> 00:43:49.110
be this successful over the past, whatever, 10 years. You
718
00:43:49.130 --> 00:43:52.469
should also pretty accurately be able to identify where the
719
00:43:52.489 --> 00:43:54.929
growth is going to come from over the next four
720
00:43:54.949 --> 00:43:59.380
to five years. And then people, which is the hardest
721
00:43:59.400 --> 00:44:03.059
thing to read. It's the hardest thing to diligence. Again, you,
722
00:44:03.099 --> 00:44:05.099
you never know until you've worked in for three months,
723
00:44:05.119 --> 00:44:07.539
but you try and get a grasp on, you look
724
00:44:07.559 --> 00:44:11.809
at the history, uh, you, you meet them a lot.
725
00:44:11.909 --> 00:44:14.570
You're trying to get a good feel whether, is this
726
00:44:14.610 --> 00:44:18.190
a person who I can trust? Number one, is this
727
00:44:18.230 --> 00:44:19.750
a person who is going to be a good partner
728
00:44:20.349 --> 00:44:22.349
for me in building this business and taking it forward
729
00:44:22.369 --> 00:44:25.510
for the next four years? And if it ticks those
730
00:44:25.550 --> 00:44:27.829
two boxes, you say the data's there, I'm convinced this
731
00:44:27.849 --> 00:44:30.519
is a good business. and there's no good feel, I
732
00:44:30.559 --> 00:44:32.469
can see in the data and it all makes sense
733
00:44:32.489 --> 00:44:34.849
to me where the growth is going to come from,
734
00:44:35.769 --> 00:44:38.530
and I trust these people and I think they're competent,
735
00:44:39.630 --> 00:44:42.769
then that's two big green ticks. The other one is
736
00:44:42.809 --> 00:44:45.639
the macro. And of course, if there's no issues with
737
00:44:45.659 --> 00:44:48.639
the macro environment and the macro for this industry is growing,
738
00:44:48.659 --> 00:44:54.059
then you should have good conviction that you'd want to
739
00:44:54.280 --> 00:44:54.980
bid on this business.
740
00:44:56.019 --> 00:45:02.130
Yeah, that's good. You referenced early in our conversation, Lee,
741
00:45:02.309 --> 00:45:07.530
about AI. I'm curious, you know, I see companies, I
742
00:45:07.590 --> 00:45:11.250
come in as an advisor and I'm trying to, you know,
743
00:45:11.349 --> 00:45:14.210
analyze the health of that business because if a company
744
00:45:14.230 --> 00:45:16.889
is not healthy, they're probably not ready to go to market.
745
00:45:16.969 --> 00:45:18.570
And if they're not ready to go to market, this
746
00:45:18.610 --> 00:45:21.519
is going to be a big frustration for all of us, right?
747
00:45:21.679 --> 00:45:24.039
You know, we're not going to get a deal done
748
00:45:24.119 --> 00:45:26.860
or we're going to get a crappy deal done at best.
749
00:45:27.610 --> 00:45:31.690
But talk to us for a moment about AI and
750
00:45:31.769 --> 00:45:38.090
how a CEO can determine where AI is in their business.
751
00:45:38.170 --> 00:45:41.289
Because as a buyer, and we're in the mind of
752
00:45:41.349 --> 00:45:44.519
an acquirer right now talking to Lee, how do you
753
00:45:44.599 --> 00:45:47.139
frame that up? How do you analyze that? And as
754
00:45:47.179 --> 00:45:50.599
a buyer, are you looking at where they are with
755
00:45:50.639 --> 00:45:51.000
their AI?
756
00:45:51.019 --> 00:45:54.190
Yeah. So there's a few ways to go with that.
757
00:45:54.230 --> 00:45:56.070
So one, you'd look at the industry and you say,
758
00:45:56.150 --> 00:45:58.050
is AI going to be a threat or an opportunity?
759
00:45:59.030 --> 00:46:02.409
So if you look at business services, it looks like
760
00:46:02.469 --> 00:46:04.989
more of a threat right now because you would say
761
00:46:05.070 --> 00:46:11.090
business services like consultants and accountants and marketing agencies, AI
762
00:46:12.190 --> 00:46:14.530
is starting to replace a lot of the bottom row.
763
00:46:14.969 --> 00:46:17.349
All the kids in the associates you used to employ
764
00:46:17.369 --> 00:46:20.269
to do the analytics and the groundwork and the number crunching,
765
00:46:21.110 --> 00:46:24.210
an AI agent can do that now So those industries,
766
00:46:24.250 --> 00:46:26.429
you'd go, okay, it's going to be challenged. There is
767
00:46:26.469 --> 00:46:29.630
some upside, but you're going to see an impact on
768
00:46:29.670 --> 00:46:32.280
your margin because you can't continue charging what you've been
769
00:46:32.340 --> 00:46:36.039
charging while you're using AI because you have to pass
770
00:46:36.059 --> 00:46:39.519
those costs along. So you look at the industry first.
771
00:46:40.400 --> 00:46:43.400
And then within the business, to figure out where AI
772
00:46:43.480 --> 00:46:47.010
is going to fit, first of all, you need to
773
00:46:47.030 --> 00:46:50.230
have the data. I've had so many conversations where companies
774
00:46:50.250 --> 00:46:53.000
have said, what should we do with AI? And I said,
775
00:46:53.099 --> 00:46:56.900
absolutely nothing. And they said, why? I said, well, you've
776
00:46:56.940 --> 00:47:00.159
got no data at all in your business. You've got
777
00:47:00.199 --> 00:47:02.880
a CRM no one's used for three years. You've built
778
00:47:02.900 --> 00:47:06.159
your own CRM, which is pretty useless. You think you've
779
00:47:06.199 --> 00:47:08.860
got a lot of data, but there are several sources
780
00:47:08.909 --> 00:47:11.969
of truth. There are five definitions of the word conversion
781
00:47:11.989 --> 00:47:14.610
in your business. Each department is using its own data set.
782
00:47:15.769 --> 00:47:18.949
It's taped together. It's Excel spreadsheets taped together. You've got
783
00:47:18.989 --> 00:47:22.980
no data. Unless you have a foundation of data AI
784
00:47:23.019 --> 00:47:25.219
is not going to be useful. Once you have that
785
00:47:25.280 --> 00:47:29.130
foundation of data, you can drop AI on top and
786
00:47:29.150 --> 00:47:31.690
it will be beautiful. It will point towards gaps in
787
00:47:31.710 --> 00:47:34.329
your business. It will point towards opportunities in your business.
788
00:47:34.869 --> 00:47:37.309
It will give you more insight than you've ever had before,
789
00:47:37.969 --> 00:47:40.650
but you've got to give it a strong foundation of data.
790
00:47:43.179 --> 00:47:50.119
That's good stuff, man. You've often said that CEOs, not
791
00:47:50.199 --> 00:47:55.039
necessarily technology, And this is a radical shift between one
792
00:47:55.099 --> 00:47:58.440
question and the other. So pardon the lack of a segue.
793
00:47:59.179 --> 00:48:02.099
We're talking about technology, but now we're talking about the CEO.
794
00:48:02.780 --> 00:48:06.099
You've said many times that the CEO is often the
795
00:48:06.320 --> 00:48:11.019
biggest bottleneck, right? The thing that the one fly in
796
00:48:11.039 --> 00:48:12.119
the ointment, so to speak.
797
00:48:12.920 --> 00:48:13.199
Yeah.
798
00:48:13.559 --> 00:48:17.460
When you come in, you're looking at a lot of things,
799
00:48:17.519 --> 00:48:20.619
including data, but you're also looking at behaviors, right, of
800
00:48:20.659 --> 00:48:27.860
that CEO and in the senior management team. My question is,
801
00:48:27.889 --> 00:48:35.469
what behaviors tell you that the CEO has become the
802
00:48:35.510 --> 00:48:39.789
biggest constraint on the company's growth? What jumps out at you?
803
00:48:40.989 --> 00:48:44.650
It's all about intellectual curiosity. The worst thing a CEO
804
00:48:44.690 --> 00:48:48.289
can tell you is say something like, this is how
805
00:48:48.309 --> 00:48:52.309
we've always done business. And this is why we've been successful.
806
00:48:53.409 --> 00:48:57.360
Because it's those CEOs that are myopic that don't think
807
00:48:57.400 --> 00:49:00.400
the world is changing. And we've never been in a
808
00:49:00.440 --> 00:49:03.659
time where the world is changing faster than this. It's
809
00:49:03.699 --> 00:49:06.780
crazy how much the world is changing. It's those CEOs
810
00:49:06.820 --> 00:49:10.070
that think, what made me successful the past 20 years
811
00:49:10.130 --> 00:49:12.170
is going to make me successful the next 20 years.
812
00:49:13.610 --> 00:49:16.869
That's a massive red flag. You need someone who's going
813
00:49:16.889 --> 00:49:19.050
to be open to change and open to test and
814
00:49:19.110 --> 00:49:22.239
learn and open to figuring out where the next room is.
815
00:49:22.760 --> 00:49:26.440
Where do we go from here? And look, sometimes CEOs
816
00:49:26.460 --> 00:49:29.079
are not set up for that. Let's be honest. Sometimes
817
00:49:29.159 --> 00:49:32.389
CEOs do not want a business built on data because
818
00:49:32.590 --> 00:49:35.750
they would feel too exposed and they would say, look,
819
00:49:35.949 --> 00:49:38.550
I've had my own fiefdom for the past 20 years
820
00:49:38.630 --> 00:49:41.730
and We've had no data, but it's been good. They
821
00:49:41.750 --> 00:49:44.110
would feel exposed if suddenly everything was transparent because it
822
00:49:44.130 --> 00:49:47.010
would point to things that they haven't done right over
823
00:49:47.050 --> 00:49:51.039
that period. Yeah, so it's all down to the CEO.
824
00:49:51.519 --> 00:49:54.199
And sometimes firms will go in. This is not a
825
00:49:54.219 --> 00:49:57.380
bad thing. An acquisition might be an exit for the CEO,
826
00:49:58.000 --> 00:50:01.980
and the CEO may move to a chair position instead.
827
00:50:02.920 --> 00:50:06.929
And that's not always bad. And sometimes the CEO will
828
00:50:06.949 --> 00:50:08.300
make a lot of money out of it and the
829
00:50:08.320 --> 00:50:11.429
smart ones will admit and say, you're right, I'm probably
830
00:50:11.469 --> 00:50:14.010
not set up for the next five years of this business.
831
00:50:14.210 --> 00:50:16.670
I've done a great job so far, but I don't
832
00:50:16.710 --> 00:50:19.690
get AI. I'm not a data guy. I'm not digital.
833
00:50:20.989 --> 00:50:22.989
I'm probably not your guy. But move me into the
834
00:50:23.030 --> 00:50:27.159
chair role and I'll roll some equity and my second
835
00:50:27.199 --> 00:50:29.079
bite will be just as good. And this works out
836
00:50:29.119 --> 00:50:29.599
for both of us.
837
00:50:29.920 --> 00:50:34.579
Yeah, yeah, yeah. Yeah, that's a big deal, right? That's
838
00:50:34.619 --> 00:50:37.940
a big deal. Uh, and I think it's hard and
839
00:50:37.980 --> 00:50:40.800
this is, this is a slight pivot, but I think
840
00:50:40.840 --> 00:50:44.300
it's really hard. And having been through this now three
841
00:50:44.340 --> 00:50:48.980
times personally, uh, I knew in all three cases that
842
00:50:49.079 --> 00:50:51.420
it was time for me to turn the reins over,
843
00:50:51.780 --> 00:50:56.329
you know, and that's not because I'm real smart. Uh,
844
00:50:56.400 --> 00:50:59.139
I'm not very smart. It's not because I am super
845
00:50:59.179 --> 00:51:05.590
self-aware because I'm really not, I'm probably a, a recovering narcissist. But,
846
00:51:06.230 --> 00:51:08.789
you know, I knew Lee when it was time for
847
00:51:08.849 --> 00:51:12.489
me to hand the reins over. And, you know, and
848
00:51:12.530 --> 00:51:16.130
I did. I did because there were people that were stronger, faster,
849
00:51:16.869 --> 00:51:21.170
you know, smarter, better looking than me. But to your point,
850
00:51:21.369 --> 00:51:23.920
I could still serve that role. And I did a
851
00:51:23.960 --> 00:51:26.619
deal with my health care where I stayed on for
852
00:51:26.639 --> 00:51:30.039
another four years, largely as sort of the face of
853
00:51:30.400 --> 00:51:33.039
because the business had kind of been built around me,
854
00:51:33.780 --> 00:51:37.639
but it was going to a different level, not Chuck
855
00:51:37.820 --> 00:51:41.500
as the CEO, but I could still play a role.
856
00:51:42.320 --> 00:51:45.159
And I think it's important for business owners, and we
857
00:51:45.199 --> 00:51:47.900
have people right now listening to us saying, is it
858
00:51:48.019 --> 00:51:51.739
time for me to step aside? Is it time for
859
00:51:51.780 --> 00:51:54.929
me to move into the chair position, as you talked about, right?
860
00:51:55.570 --> 00:51:55.780
Yeah.
861
00:51:56.280 --> 00:51:59.710
And I think that's a big deal, and it's really important.
862
00:52:00.329 --> 00:52:03.489
It's important for the CEO making that call, for the
863
00:52:03.550 --> 00:52:07.829
buyer making that transaction happen, for the team that's got
864
00:52:07.849 --> 00:52:12.210
to live with the new owners. By the way, one
865
00:52:12.710 --> 00:52:14.469
of the things that you said, I want to come
866
00:52:14.510 --> 00:52:16.719
back to a couple of quick questions before we conclude.
867
00:52:17.500 --> 00:52:21.059
But one of the quotes, and I'm going to botch
868
00:52:21.099 --> 00:52:22.440
it up because I don't have it in front of me.
869
00:52:23.199 --> 00:52:29.000
But you said everything is wonderful. Everything is great. post-close
870
00:52:29.300 --> 00:52:32.400
until the new CFO shows up, which I thought was,
871
00:52:33.019 --> 00:52:36.880
was really clever. Can you explain what you meant by that?
872
00:52:38.019 --> 00:52:41.280
Yeah. Cause if a new CFO, the job is to
873
00:52:41.300 --> 00:52:46.579
clean things up and you put it, if you, by virtue,
874
00:52:46.699 --> 00:52:49.760
you have to hire a new CFO, you're signaling the
875
00:52:49.780 --> 00:52:52.760
CFO wasn't up to scratch and maybe the PE firm
876
00:52:52.849 --> 00:52:56.190
picked that up in the diligence. So when there's a
877
00:52:56.230 --> 00:52:58.550
new sheriff in town, when a new CFO comes in,
878
00:52:59.409 --> 00:53:03.030
things will get cleaned up. And some things in the
879
00:53:03.050 --> 00:53:06.110
business will change. And it should be for the better.
880
00:53:06.510 --> 00:53:08.329
At the end of the day, this is to improve
881
00:53:08.349 --> 00:53:12.780
the business, get the business in better shape. But yeah,
882
00:53:12.820 --> 00:53:14.440
some things will be broken in that period.
883
00:53:16.440 --> 00:53:20.159
Do you see, and again, you do your business well,
884
00:53:20.260 --> 00:53:23.920
you do it with character, high character, with high integrity, right?
885
00:53:23.960 --> 00:53:28.710
You're doing it the right way. I'm curious, in all
886
00:53:28.750 --> 00:53:31.630
the deals that I've been a part of, they've worked
887
00:53:31.710 --> 00:53:34.789
out well, short term and long term, thank goodness. I'm
888
00:53:34.869 --> 00:53:38.309
sure at some point, you know, you and I both
889
00:53:38.369 --> 00:53:41.429
may have a blemish on our record, but We're talking
890
00:53:41.449 --> 00:53:44.670
about the day after, the day after close. You know,
891
00:53:44.750 --> 00:53:47.449
I mentioned the story of my client who the day
892
00:53:47.550 --> 00:53:50.570
after was, it was a bad day, bad day at BlackRock.
893
00:53:51.550 --> 00:53:56.969
But what changes do you see on day one of
894
00:53:57.010 --> 00:54:01.710
the new world order that sometimes a seller just doesn't see?
895
00:54:03.349 --> 00:54:05.889
Well, the big difference is from day one, you're on
896
00:54:05.909 --> 00:54:09.869
a shot clock. That is the major difference. Before that,
897
00:54:10.320 --> 00:54:13.449
You had your firm, it was growing nicely. There was
898
00:54:13.510 --> 00:54:16.610
no pressure to grow, although of course you want to grow.
899
00:54:17.610 --> 00:54:22.050
You weren't on a clock. Day one of private equity ownership,
900
00:54:22.110 --> 00:54:25.289
you are on a clock. The PE firm has put
901
00:54:25.349 --> 00:54:29.210
money to work. This is an investment. And we want
902
00:54:29.250 --> 00:54:32.650
to get out ideally in four years. That means we
903
00:54:32.690 --> 00:54:36.829
need to see positive metrics every quarter. We need to
904
00:54:36.869 --> 00:54:40.099
see that that trajectory is moving fast enough for us
905
00:54:40.139 --> 00:54:43.099
to make the investment thesis and to make sure we
906
00:54:43.139 --> 00:54:45.159
make the money out of this that we intended to
907
00:54:45.179 --> 00:54:50.329
when we bought you. So speed and timing is the
908
00:54:50.349 --> 00:54:53.130
biggest difference and maybe the biggest shock that founders get
909
00:54:53.170 --> 00:54:55.429
on day one.
910
00:54:56.949 --> 00:55:01.219
Yeah, good point, man. Speaking of data and metrics, we've
911
00:55:01.260 --> 00:55:03.179
talked a lot about data today. It's been kind of
912
00:55:03.239 --> 00:55:09.599
a theme in our conversation. I'll teach courses on KPIs
913
00:55:09.659 --> 00:55:16.880
and building KPIs. It's a term that sometimes it's embraced.
914
00:55:17.800 --> 00:55:22.409
My clients will get on board with revamping their KPIs
915
00:55:22.429 --> 00:55:28.730
or whatever. Sometimes it's just, man, it's like talking to
916
00:55:28.750 --> 00:55:35.860
a wall. You have used this term before, KPI laundering.
917
00:55:36.449 --> 00:55:37.150
What do you mean by that?
918
00:55:38.769 --> 00:55:41.889
Well, you could go crazy with KPIs. You could have 1,000
919
00:55:41.889 --> 00:55:46.119
KPIs in your business. And digital makes it even worse.
920
00:55:46.860 --> 00:55:50.260
And you can hide behind KPIs like impressions. The website
921
00:55:50.280 --> 00:55:54.340
got 100% more impressions last week. And some people in
922
00:55:54.360 --> 00:55:57.090
the board deck might go, that's amazing. And we got
923
00:55:57.090 --> 00:56:02.530
100% more clicks. But my question to that would be,
924
00:56:02.590 --> 00:56:05.070
so what? Did we make more money? At the end
925
00:56:05.110 --> 00:56:06.849
of the day, a business is there to make money.
926
00:56:07.590 --> 00:56:12.340
There are a thousand KPIs you can hide behind. But ultimately,
927
00:56:12.380 --> 00:56:14.719
the KPI should be about, did we make more money
928
00:56:14.739 --> 00:56:18.539
in this business? Does the KPI tell me, am I
929
00:56:18.619 --> 00:56:21.989
investing well in the marketing channels? Does the KPIs tell me,
930
00:56:22.010 --> 00:56:25.130
am I acquiring customers at a cost that I should
931
00:56:25.150 --> 00:56:28.710
be acquiring customers for? Do the KPIs tell me, am
932
00:56:28.869 --> 00:56:32.969
I converting those leads to sales as effectively as I
933
00:56:33.010 --> 00:56:36.269
should be? Do the KPIs tell me the average order values?
934
00:56:36.690 --> 00:56:38.889
Am I achieving the average order values that I should
935
00:56:38.929 --> 00:56:44.010
be in this business? Do the KPIs tell me recurring revenue?
936
00:56:44.469 --> 00:56:46.409
How many more orders do I get after the first one?
937
00:56:47.860 --> 00:56:50.860
So laundering, I mean, look, you can bullshit a lot
938
00:56:50.980 --> 00:56:56.139
in board decks, in team decks. You can make KPIs
939
00:56:56.219 --> 00:56:58.969
make you look like the best person on earth, like
940
00:56:59.010 --> 00:57:03.219
the most effective manager possible. That's what laundering is. But
941
00:57:03.239 --> 00:57:04.519
at the end of the day, if you say we're
942
00:57:04.539 --> 00:57:08.659
here to make money, that's it. There's probably five KPIs
943
00:57:08.699 --> 00:57:10.559
we should be looking at every day. And that's telling
944
00:57:10.599 --> 00:57:13.559
us if we are running a successful business or not. Yeah.
945
00:57:14.969 --> 00:57:18.949
And, you know, by being faithful, I will use that
946
00:57:18.989 --> 00:57:23.489
term or diligent, maybe even a better term to those
947
00:57:23.750 --> 00:57:28.340
functional KPIs, the ones that really make a difference to
948
00:57:28.380 --> 00:57:32.139
your point of growing the business. it adds so much
949
00:57:32.380 --> 00:57:37.480
value and credibility, right? For the, you know, to the seller,
950
00:57:37.519 --> 00:57:40.019
when the buyer, when, when Lee shows up and knocks
951
00:57:40.099 --> 00:57:42.280
on their door and you're looking to buy that business,
952
00:57:43.579 --> 00:57:48.500
you've got strong KPIs and they're, they, they signal a
953
00:57:48.639 --> 00:57:55.179
good message. Doesn't it give the seller so much more credibility, right? And,
954
00:57:55.659 --> 00:57:58.420
and for the buyer, so much more of a comfort level,
955
00:57:59.000 --> 00:58:03.179
that we're actually buying a good business that we're going
956
00:58:03.199 --> 00:58:04.380
to be able to exit in four years?
957
00:58:05.199 --> 00:58:07.260
So much more. You have to know your numbers. If
958
00:58:07.280 --> 00:58:09.909
you know your numbers and you've recorded those numbers and
959
00:58:09.949 --> 00:58:13.510
you build a system to record those numbers, I mean,
960
00:58:13.550 --> 00:58:16.750
the real test is if you're talking about your business,
961
00:58:17.389 --> 00:58:19.369
you shouldn't have to pull up a PowerPoint deck to
962
00:58:19.409 --> 00:58:21.989
show the numbers. You should just go live into the
963
00:58:22.010 --> 00:58:24.650
system and say, this is my system. These are the
964
00:58:24.690 --> 00:58:26.960
numbers I see every day. This is how I control
965
00:58:27.000 --> 00:58:30.219
my business. That gives you the real trust to build
966
00:58:30.260 --> 00:58:32.239
a real revenue engine. Yeah.
967
00:58:32.739 --> 00:58:32.940
Yeah.
968
00:58:33.440 --> 00:58:37.420
And I think you said data doesn't lie, right? You know,
969
00:58:39.239 --> 00:58:44.150
what a great, that's a strong statement. Data just doesn't lie. Yeah.
970
00:58:44.210 --> 00:58:48.110
Well, some data lies. You can make data lie very easily,
971
00:58:48.170 --> 00:58:52.300
but data, if you believe the data and you can
972
00:58:52.380 --> 00:58:56.239
show why you've got trust in this data, Data solves arguments.
973
00:58:56.599 --> 00:58:58.840
There should be no good fail. The data should solve
974
00:58:58.880 --> 00:58:59.360
the argument.
975
00:59:00.320 --> 00:59:04.570
That's good. That's really good. Lee McCabe, we're going to
976
00:59:04.699 --> 00:59:07.510
wind it up here. I've got one more question. And
977
00:59:07.530 --> 00:59:09.969
this is, again, I feel like some of my questions
978
00:59:10.260 --> 00:59:15.139
are just unfair because we could spend probably 45 minutes
979
00:59:15.179 --> 00:59:20.320
on each question. But you've had tremendous success, 25 years.
980
00:59:20.599 --> 00:59:26.119
You've been around great companies, executives, investors. You've done really
981
00:59:26.159 --> 00:59:30.099
good deals. if you had to wrap up your entire
982
00:59:30.219 --> 00:59:35.670
net worth into one privately held business, right? You're going
983
00:59:35.690 --> 00:59:39.469
to go after one target. You've got all the marbles, man,
984
00:59:39.530 --> 00:59:42.989
on the table for this one deal, the one deal
985
00:59:43.010 --> 00:59:44.789
that you're going to do, the last deal that you're
986
00:59:44.829 --> 00:59:49.630
going to do. And you have to maximize that value, right?
987
00:59:50.449 --> 00:59:52.670
Of that business for the next four years, because that's
988
00:59:52.710 --> 00:59:57.349
your goal to exit. What would you do? the day
989
00:59:57.630 --> 01:00:02.409
after buying that company, the first Monday morning, what's on
990
01:00:02.449 --> 01:00:05.530
the radar? What's on your agenda? And I ask that
991
01:00:05.630 --> 01:00:11.329
because my listeners want to know what's that. You've got all,
992
01:00:11.449 --> 01:00:14.449
you've got, you're all in, man. You're all in on
993
01:00:14.489 --> 01:00:18.329
this deal. What's the first thing that you do? I
994
01:00:19.449 --> 01:00:22.170
want to know that, but also want my listeners to
995
01:00:22.289 --> 01:00:26.219
know what you're thinking that's going to happen on day one.
996
01:00:27.219 --> 01:00:30.050
I build the architecture of data if it doesn't exist
997
01:00:30.239 --> 01:00:33.429
straight away. So you build the tech stack to make
998
01:00:33.469 --> 01:00:35.610
sure everything is tagged and tracked and that business is
999
01:00:35.650 --> 01:00:39.250
collecting all the data we could possibly collect. And then
1000
01:00:39.289 --> 01:00:41.969
you architect it in a data warehouse so I can
1001
01:00:42.010 --> 01:00:47.159
actually analyze that data. That's absolutely the first thing I
1002
01:00:47.199 --> 01:00:49.820
would do because once you have that, like we've talked about,
1003
01:00:50.400 --> 01:00:53.900
the business becomes much easier. There's no good field. There's
1004
01:00:53.940 --> 01:00:57.849
no arguments or opinions. You know, there's no disagreement between
1005
01:00:57.869 --> 01:01:01.610
the CMO and the head of sales or the CTO.
1006
01:01:02.340 --> 01:01:05.300
If you have built a business built on data, it's
1007
01:01:05.420 --> 01:01:09.199
very clear for everybody what needs to get done tomorrow,
1008
01:01:09.500 --> 01:01:11.960
what needs to get done next week, what we need
1009
01:01:11.980 --> 01:01:14.179
to get done in the next six months. If you've
1010
01:01:14.199 --> 01:01:17.860
got the data, you can build very good plans around that. And,
1011
01:01:17.880 --> 01:01:20.860
of course, you've got the attribution. You start building. You
1012
01:01:20.900 --> 01:01:23.500
can see the results every day. You can say, okay,
1013
01:01:23.760 --> 01:01:25.519
we said we were going to do these five things.
1014
01:01:26.260 --> 01:01:28.820
did they move the needle? Yes, they did. Cause I
1015
01:01:28.840 --> 01:01:31.559
can see in the data, they moved the needle straight away. Great.
1016
01:01:32.139 --> 01:01:34.460
What's the next five projects, the next five gaps we've
1017
01:01:34.500 --> 01:01:37.809
got to close in this business. So absolutely. The first
1018
01:01:37.849 --> 01:01:39.690
thing I would do is build a business on data,
1019
01:01:39.750 --> 01:01:40.869
build a data architecture.
1020
01:01:42.829 --> 01:01:45.050
That's good stuff. And you know, what I love Lee,
1021
01:01:45.110 --> 01:01:47.889
as we close out, uh, that's been a theme of
1022
01:01:47.929 --> 01:01:51.800
today's conversation and we've gone over, I apologize for that.
1023
01:01:51.820 --> 01:01:54.360
I want to keep my integrity with you and the audience, but, uh,
1024
01:01:55.349 --> 01:02:00.730
I love that theme because that is something you can attack, right?
1025
01:02:00.869 --> 01:02:03.489
If we have a data issue in our business, you
1026
01:02:03.530 --> 01:02:08.340
can attack that starting tomorrow. So I'd like to, you know,
1027
01:02:08.360 --> 01:02:11.880
I want to leave the conversation with your very strong
1028
01:02:12.619 --> 01:02:17.840
reinforcements of that concept of building good data, having good data,
1029
01:02:18.360 --> 01:02:22.079
managing the business, growing the business with data, I think
1030
01:02:22.260 --> 01:02:24.780
is a wonderful theme. And I think it's a message, frankly,
1031
01:02:24.820 --> 01:02:27.730
that a lot of my clients, a lot of listeners
1032
01:02:28.349 --> 01:02:30.550
would be wise to adhere to.
1033
01:02:31.389 --> 01:02:34.889
Yeah, you can't manage what you can't measure. We've been
1034
01:02:34.929 --> 01:02:38.610
saying that forever. Very few companies have followed that advice.
1035
01:02:38.889 --> 01:02:44.570
Yeah, yeah. So well said. Lee McCabe, great conversation, man.
1036
01:02:44.630 --> 01:02:45.650
Thank you for your time.
1037
01:02:45.670 --> 01:02:45.949
Thank you.
1038
01:02:46.409 --> 01:02:49.429
How can we follow you? You're doing some really good
1039
01:02:49.489 --> 01:02:54.219
stuff with your private equity outreach. How can we follow you?
1040
01:02:54.280 --> 01:02:56.219
Just stay in touch with you, man.
1041
01:02:57.030 --> 01:03:00.050
You can find me on LinkedIn. So search for Lee McCabe.
1042
01:03:00.269 --> 01:03:03.429
You should be able to find me pretty easily. Yeah. Cool.
1043
01:03:04.090 --> 01:03:08.070
Thank you so much, Lee. What a fantastic conversation, man.
1044
01:03:08.090 --> 01:03:12.710
You've helped me. And I think that's a microcosm of
1045
01:03:12.789 --> 01:03:15.329
all the value you're going to bring to business owners.
1046
01:03:15.969 --> 01:03:16.829
So thank you, my friend.
1047
01:03:17.469 --> 01:03:18.610
Pleasure. Thank you. Yeah.
1048
01:03:19.360 --> 01:03:22.539
Really good conversation with Lee today. I really appreciate his
1049
01:03:22.579 --> 01:03:26.760
time and insight. It's a real treat getting into the
1050
01:03:26.840 --> 01:03:31.429
mind of an acquirer, really understanding what's important for them
1051
01:03:32.050 --> 01:03:36.070
because we can then build better partnerships. I want to
1052
01:03:36.110 --> 01:03:40.579
thank you, my listener. This show exists because of you.
1053
01:03:40.719 --> 01:03:42.980
And again, we're working really hard to make it a
1054
01:03:43.659 --> 01:03:47.599
great podcast that just brings value. If there's anything I
1055
01:03:47.639 --> 01:03:51.190
can do to help your business, please let me know. Again,
1056
01:03:51.210 --> 01:03:57.889
my direct line is 864-915-0066. I look forward to hearing
1057
01:03:57.929 --> 01:04:01.409
from you, and I look forward to our next episode conversation.
1058
01:04:01.909 --> 01:04:05.070
Thanks for listening, and I hope you have a fantastic rest.
1059
01:04:04.889 --> 01:04:05.230
Of the week.
1060
01:04:14.639 --> 01:04:15.179
Thank you.