Buyers and Builders
00:32:15 · Mikk, Ramsey Sahyoun
[00:32:15] S0: Now the cost of capital has also moved higher. How how has it changed your your day to day returns, everything? How much you can you can share? [00:32:26] S1: Yeah. I think, thankfully, like, you know, we've pretty disciplined. So, you know, we we didn't you know, the... I mean, the the cost of capital and interest rates going up is like a real... It's real... Interest expense is a real expense. But, you know, I think we were disciplined in in our acquisitions when rates were, you know, close to zero. And I think that led to, you know, a healthy balance sheet and and, you know, being able to keep going when when rates went up, you know, four or 5%. Despite that, prices for businesses really kinda held steady. I mean, I I think our evaluations that we've been paying have been pretty consistent over the last, like, four years or so. Prior to that, they were a lot cheaper. So there was kind of this moment in twenty twenty, twenty twenty one where valuations expanded, and they've they've held pretty steady from there. But that was really the point at which we said, okay, we gotta we gotta be really proactive in how we create value in these businesses because we have to we have to grow the earnings of these businesses faster now that we're we're having to pay a little bit more. So, yeah, that that really... Yeah. If if if you just look at our data, it's it's pretty stark that kind of pre 2021 period and and the post 2021 period as far as valuations of companies.
00:34:02 · Mikk
[00:34:02] S0: Now, Jeff was sharing a slide on the conference in Stockholm, is your economic engine, a repeatable flywheel that compounds growth and value. And it starts with M and A, then there is a talent and then there is a playbook. Let's talk about the talent part, which is the post acquisition. So now trying to understand, do you acquire always majority, 100%, What's the ratio there? And what happens post close? How much do you change? What do you do maybe first thirty, sixty, ninety days?
00:34:38 · Ramsey Sahyoun
[00:34:38] S1: Yes. Yes. So we always buy 100% of the business. We allow sellers to roll a portion of their proceeds in... Into Evergreen at the holdco level, so we have one cap table. I think that just makes things a lot simpler and cleaner. We have a 100% ownership of all the companies underneath the Evergreen umbrella, and then people can participate in the overall success of the company through their rollover equity. And on talent, so talent's a big one. We, in every deal we do, we're recruiting somebody into that business, a senior management capacity. And that can really take two forms. One, about half the time people are selling their business to us to retire or to transition out of it and go, you know, onto their next entrepreneurial adventure. So in those cases, some of the time they've groomed a successor that can transition into the CEO role. A lot of times, they haven't, and so we will recruit a CEO into that business to be their successor. And that's something Alpine has done for a long time, and we learned kind of how to do that well from them. But even in cases where the founder is going to continue to run the business, we're trying to grow the company. We're extremely focused on organic growth on the top and the bottom line, and that often requires investment in the senior team. So we'll work with each business and figure out, you know in a lot of these businesses, a lot of times, sales are owner led, and so there's an opportunity to bring in a chief revenue officer or a chief growth officer to really kind of inflect the the revenue growth engine at the company. So that's probably the most common non CEO role that we place into into businesses. But, yeah, we're we're always looking to recruit somebody in in into the business because I think talent is obviously a critical ingredient to to growing to growing companies organically. So we we always try to, you know, pull that lever.
00:37:05 · Mikk
[00:37:05] S0: Is there anything else you can share when it comes to talent? Why I'm asking this is maybe trying to get some of the lessons you learned yourself, lessons you learned from Alpine because they've been doing that for even longer. I'm asking this, maybe there is a potential seller watching this interview or listening to this interview, and they're thinking of whether to sell to someone else or whether they should be selling to you. And they are very interested in rolling equity into Evergreen because it's a it's a growing asset, and they're very excited about this. So what they can expect maybe when it comes to this talent part? Maybe you can share more.
00:37:43 · Ramsey Sahyoun, Mikk
[00:37:43] S1: Yeah. Yeah. I I... You know, I think typical private equity will be like, you know, we'll buy 70 or 80%. The founder will, you know, maybe roll some equity and then we'll sell it again in in three or five years, but they're not really making the business better, they're just kind of like riding the existing team for, like, one last three to five year run. And and I think what what Alpine noticed and instilled in us is just this belief that talent drives investing... You know, management talent drives investing outcomes. And so it's not acceptable to just focus on, you know, the levers you're gonna do on pricing or sales and marketing or cost, like, without addressing the talent piece. Do you have the right talent in the business? How can you supplement? Like, what talent can you add to the business that's just gonna change the trajectory of the company? These are small businesses. Like, one person can move the needle on on the results of a business. So, you know, I think first and foremost, we think about that. We just try to have a view into, you know, what talent can we add to this business to help it get to the next level. [00:39:17] S0: You have so much data. It's it's it's question for maybe listeners. What have you learned about the difference between motivating a founder who rolls equity and motivating a non founder CEO you install after the acquisition? Maybe you can share some of the data you've seen.
00:39:36 · Ramsey Sahyoun
[00:39:36] S1: I think with a founder who has already had a big liquidity event, there are things you can do on incentives, of course, like rollover equity helps. And we have a long term incentive plan that I'll talk about a little bit. And and and that... Those those things help. But I think with founders, there needs to be some intrinsic, more qualitative level of motivation. Like, they gotta feel connected to the company. They gotta feel empowered. They gotta I think with a founder, think it's a lot more qualitative. And then I think with a hired manager that hasn't had a big liquidity event, like, they could be more motivated with incentives. I think that would be kind of like my overarching learning. As far as like how we incentivize people that lead our individual businesses, we have incentive plan. I won't get into the specifics, but we call it the Multiplier's Club. It's all about, you know, doubling the earnings of a business within a five year period. And then there's it's rolling, so obviously you could do more than double a business after that. But it's entirely within the control of the operator, and I think that's really an important aspect. Like, it's not at the holdco level. It's it's focused on the individual business that that CEO is running. Yeah. So I I think that's another important thing is to just make it, you know, and you need to have incentives that people can actually affect the outcomes on. Like, it doesn't make sense to, you know, judge or incentivize someone based on, you know, what acquisitions we're doing. And it doesn't make sense to, like, incentivize someone that's running a MSP in, you know, Washington DC with, you know, based on how much M and A we do in the ERP consulting space. Like, doesn't make sense. So I think tying it to something that the operator can really have control over is critical.