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.
00:38:32 · James Andersen, Mikk
And what I don't want is for people to think of these things as a reward. They're things that you earn, and it's supposed to be an incentive. But it's a really hard thing to manage. So all these incentive plans and things that we put in place, we work very hard to help people grasp what they're actually worth. But in the end, what people value is cash today. It's just part of human nature, It really is. [00:38:58] S0: Next, I want to understand then, let's call it like the inside the mind of an investor. And again, you wrote an article, Experts are inputs, not answers. What is your take on this? Because you are partnering with those, again, special individuals like Danish guy who knows every detail about the specific industry, the product, everything. And then you go there and just start giving advice and obviously wanting to improve the business. So what is the how does your mind work when it comes to joining an individual like this?
00:39:32 · James Andersen
[00:39:32] S1: I think one of things that happens in private equity a lot is there's a lot of really smart people in private equity, and it's amazing how often they have disdain for the founder of a business. Like, yeah, this guy doesn't know anything. We don't think like that. I mean, we need to be humble. I'm never going to know the business as well as the founder does. But I've seen a lot of business models, and we've seen things that are applicable from, take healthcare even into manufacturing. Sometimes that happens. So what we try to do is help the founder understand what his blind spots might be, and try to say, Look, the way we think about a business is, we're trying to help you do the things you need to do today, for what you want to be five years from now. Because what we found over and over again in founder led businesses is and again, this is very different than big market private equity we're not going in there to cut costs. We haven't done it once. We've done, what, 45 platforms? I can't think of a single time when we made any big part of our return by cutting costs. Because almost always, these companies have been underinvested in. They haven't spent the money they need for the systems and processes and people they need to be double and triple the size, which is why a lot of these founder led businesses stall. You know, if you think about founders, most of them, when they started, they didn't have any money, right? So they like we did, like we would do everything we could to save $10 on a plane ticket, because we had to. You know, when we went to buy that first company, Via, we found a $19 hotel room to stay in when we went to visit the company. Dollars 19! Because you know what? $29 was $10 more. Like, we didn't have it. But that's where most founders come from, so it's hard to change their mindset to, let's take a bunch of your cash flow and invest it in something that's not going to pay off right away. But that's our job. That's what we have to do, is to help these guys think about, here are some areas where we can help you. But we're not trying to sit next to you every day, and manage the day to day, which is why, I just wrote something about what I call to OP or not to OP. We've chosen not to use operating partners, because we don't want to micromanage the founder. We want the founder to do what they do really well, which is operate.