00:28:59 · James Andersen, Mikk
[00:28:59] S1: Look, it's not easy, but it's really more persistence. You know, the term overused term maybe is grit, but it's persistence. You just got to stay at it. Just stay at it. Keep going. [00:29:14] S0: Let's talk about the deal number three. It was the daycare deal again, with a terrific partner you've said before.
00:29:22 · James Andersen
[00:29:22] S1: Yeah, that was actually, I think, our fourth deal. This company called Senior Care Centers of America. It was an adult daycare business, 17 centers in four states. And it was owned by basically an absentee owner, there was a management team in place, so it was a management buyout. They were buying the company out from the owner, and we were fortunate to be able to convince them that they should partner with us. And, you know, we didn't pay a lot of money for the business, but it was our first health care deal. Like, we didn't know anything about health care at all, quite honestly. But we looked at the business and said, you know, basically it's center based. There's only one payment code. Like, it's not, yes, it's healthcare, but we didn't think it was that different than any other particular kind of business. We had great partners, and from day one of that business, there was a larger player that we really wanted to acquire. It had been owned by a PE firm for five or six years, we thought they might part with it. But they had 50 centers in seven states, know, complementary states, not overlapping us. And we learned early on that it was a company that had, it was three times our size, but made half the amount of money that we made. So the margins were not very good. But we tried to buy that business for four years, five years, and we just couldn't get them to move. And along the way, we acquired a bunch of other 1Z, 2Z kind of centers. And, you know, our and I say we, I'll be completely honest, I don't think we added, we at Clearview added a lot to that business. We had tremendous partners who were really, really good. We just basically let them run. We helped them with the debt financing. Obviously, did all that stuff for them, we let them run because they were such good operators. So they were integrating basically single center acquisitions at a time, very often bought from mom and pops who didn't operate them very well. And these guys really knew how to operate. And we got to the point where five years in, okay, we're gonna make three or four times our money, time to sell, because we really wanted to buy that bigger company, but we couldn't do it. But so as we're just about deciding to pull the trigger to sell, we get a call from this bigger entity saying, Okay, we're ready to talk now. So we said, Great, let's do that.
00:31:47 · James Andersen, Mikk
So we decided not to sell the business, and we did find a way to acquire that bigger player. And it was incredible to see these guys go to work on a really poorly managed business. And generally, you think PE companies owned by PE are going to be very well managed. This one was not. And we were able to integrate that and I don't know, don't remember, maybe we bought 4,000,000 of EBITDA that became 16,000,000 of EBITDA in like two or three years, something like that. Because we just had great operators. And so we were able to, in the end, did 15 total acquisitions. We bought 60 centers, I think, something like that. We ended up starting with 17, we ended up with 75, so it's like 58 centers. And then we ended up selling that to Audax and made 29 times our money. Like, it was just we had great operators, and it makes a big difference. Easy people to work with. You know, the handful of suggestions that we made, they internalized and dealt with. They were just great. Phenomenal guys. [00:32:49] S0: When it comes to your experience and your philosophy now after doing so many of those deals, changing the CEO versus not changing the CEO.
00:32:58 · James Andersen
[00:32:58] S1: Yeah, we don't buy businesses like with the CEO on the vanish to put in there. We don't use operating partners, which I think makes us a little bit of a dinosaur in a way, but I think it really works for us. So we're generally going to want to invest alongside a CEO. It doesn't mean that the management team is complete. Generally, we will have to add a person or two to the team, or upgrade. Very often, these companies that we acquire don't have a very good person in the finance seat, sometimes as just a bookkeeper. It could be sometimes as a controller. We're generally going want to upgrade that position, because our job when we buy a company is to take what I like to call a teenage company and make it an adult, and we do that by improving the systems and processes so the company can scale. And you generally can't do that without somebody who's pretty good in the finance seat, so we're almost always going to upgrade there, but maybe we need a better salesperson, maybe we need somebody better in operations, who knows? But the ultimate leader is typically going be somebody we're investing alongside of. Now, we've done a handful of deals that I've worked at very well, where we invested alongside a founder, where the goal collectively, we decided the goal was going to be to help him or her transition out over a five year period. But it doesn't have to happen day one. It generally happens on year two or three when we've worked with a person. It also helps that if you bring in someone, and by the way, recruiting and evaluating and getting the right person in the seat is really hard, and you don't always get it right. So, you know, if you have that founder still hanging around, if that transition doesn't go well, you have something to fall back on. But we've done those kinds of transitions very successfully, but we haven't bought a bunch of businesses where we know we need to change the CEO out of the box. And part of the reason we don't is because in the end, we're really kind of risk averse in what we do, and in small businesses, culture is really, really important, and one wrong person can blow up a small company. A bigger company, people tend to be a lot more plug and play. If you make a mistake, you just put somebody else in the seat.
00:35:12 · James Andersen, Mikk
That doesn't work very well at these founder led businesses, until we can get them to the point where they've got better systems, better processes, deeper management team. And that's one of the reasons why when we sell those businesses, we generally get a much higher multiple than when we buy them, because we've built that kind of organization that can stand the test of time, that has the ability to scale, that is less risky. That's really what we do. That's what I would say our expertise is. [00:35:42] S0: One part of that, and I I mentioned, like, a huge part is incentives. So you wrote this article, show me the money, what moves people. And there is a quote, a reward and an incentive are not the same thing. Can you maybe elaborate on everything you've seen, what works, what doesn't work?
00:36:02 · James Andersen
[00:36:02] S1: So over a whole bunch of years, we have struggled. The founder of a business who has built something over a long period of time recognizes the value of the equity. That person generally gets it. The managers of those businesses who never risked anything to be in the business and have been paid either salary and bonus, and maybe they've got some kind of other long term incentive. It's really hard for them to get their minds around what a profit's interest will be worth to them in the future. What we don't want to do is put a profit interest plan in place, go five years with the business, sell the company, and then hand somebody, a manager, a million dollar check, and have them say, I had no idea this was worth that much. Because then it's just a reward. I don't want to reward people. I want to incentivize them. So we've struggled all along with how do we help them understand what the value of their profits interest is when it's not cash, right? It's not tradable. There's no stock market. There's no ticker they can look at where they can say, Oh, I have 100 shares, and 100 times 50 is and they can't do that. So it's really a challenge to get them to understand how much this can really be worth if they're successful. So, you know, you work with us, we can make this happen for you. And one of the things that comes up all the time is bonus plans. So bonus plans should be easy, right? Because it's a payout this year. But what we find over and over and over again is that people internalize the bonus as, I'm absolutely going to get it. And when they have a great year, and they blow the plan out of the water, and they make 120% of their bonus, nobody says it peep. They're just happy with it. But then the next year and by the way, that success sometimes happens due to nothing they've done. It could just be the industry did really well that year. And they get paid. That's fine. We have an EBITDA based bonus. You earned it. You get it. But then the next year, something may happen. It might be their fault. It may not be their fault. And the company doesn't meet its budget, and therefore they're not eligible for bonus. People get so upset, like they just want their bonus, they just want it. And trying to explain, like, this is how these plans work and why, it's a challenge all the time. It just is.