Capital Market Readiness: What Every Middle Market Founder Needs To Know

Intro  0:06

Welcome to the Growth + Exit podcast where owners of privately held middle market companies talk about founding, scaling and exiting their businesses successfully. Learn how to maximize and monetize your business on your own terms. Let’s get started.

Susan Kearney  0:30

Hi, I’m Susan Kearney, host for the Growth + Exit podcast, where owners of private companies tell their stories about founding, scaling and sometimes exiting their businesses. The podcast is brought to you by Newport LLC. Newport is a cadre of business builders, business founders, business owners who work as partners with middle market owners to help them with scaling the business, with de risking it and with sometimes taking it to market. For example, we had a government contractor who we helped build his business more profitably and then sell for 13x multiple on his EBITDA today, on the podcast, we have Doug Tatum, yeah, if you’re a listener of our podcast, you know that we had Doug on about a year ago to Talk about his journey as an entrepreneur, founding, scaling and exiting Tatum a number of years ago, but Doug has more to talk to us about. You know, Doug is on the faculty at the Florida State University, Jim Moran College of Entrepreneurship, where he teaches entrepreneurs and students, of course, as well, about how to build businesses. He’s also the author of No Man’s Land, that was a four time Award winner for business book of the year, and is all about emerging growth companies and how they grow and avoid some of the potholes that they might get into. And he’s an expert at Capital Markets, and that’s the topic for today. We’re having Doug back to talk to us about, you know, the dynamics in the capital markets currently, particularly the lower middle market for private company owners. What’s going on there? What’s different? Why should owners pay attention and so Doug, thanks for coming and being on the podcast with us today.

Doug Tatum  2:16

Well, thanks for including me as always. And I am a faculty member at FSU. We used to be known for football. So if anybody out there has a son that can throw a football through a brick wall, please contact me or Susan directly, and we will have a discussion. Anyway.

Susan Kearney  2:35

We’ll find a donor with a million dollar checkbook to take care of that, right?

Doug Tatum  2:39

Yeah, you got it. That’s what. We might even have it. We might even have the money. Just contact us.

Susan Kearney  2:43

Yeah, exactly, exactly. Okay. So now, now you’ve done your duty as an alumni. We’ll move on to the business part of the show. I know how painful those football Saturdays have been for you guys for the past. Oh boy. So Doug, tell us a little bit to start with about how you how you came across this knowledge about capital markets. How did you build your expertise? What drew

Doug Tatum  3:06

you to the topic? So to start with those of you listening, we’re going to frame this around what Susan and I at Newport. I also am a partner and on the board with with Susan at Newport, we’re talking about emerging what I call emerging growth companies. Those are companies typically between 10 and 50 million in revenue. You might self identify yourself as being too big to be small, too small to be big, and that’s what I wrote about in No Man’s Land. And years ago, I raised a bunch of money from, I say I there’s a team of us that raised some money as academics from the NASDAQ Foundation and the Edward Loeb Foundation, and we built a time series database that’s up at the University of Wisconsin right now, and it tracks every company United States. And so a decade ago, we started seeing something uniquely different in those demographics, and then I connected that with the private equity world and some of the data, and obviously in my old firm, that was a huge chunk of our our revenue. So I was kind of connected that community. And so I got interested in it, and then the data said that there was a massive consolidation going on in the middle market and the and I don’t ever believe in data unless I talk to somebody like Susan, you who are dealing with, you know, companies in the middle of the capital markets. You know, it’s kind of like the blue book for the Fed. You go out and talk to real business people, compare that to the data, and what we were finding was a new normal. And that new normal is that private equity pretty well owns the middle market. You. You know, the data is shocking. When you see how few companies there are above 100 employees United States, I would guess that in companies and above 100 employees to 500 employees, private equity probably owns a third of them already. And so what? What happened was that private equity pointed their guns downstream. And so about 80% 75 to 80% of all the deals in United States right now are add ons. So think of it as a private equity firm has a platform company pick any industry. I mean, it’s in healthcare. It’s now in DOD in your backyard, HVAC. You know, they have a large HVAC company. They bought a platform that that company. They’ve driven through no man’s land. And now what they do is they buy customers, rather than grow them the old fashioned ways. That’s called an add on. Well, the reality of that is that when I first started dealing in private equity, and I was global chairman of ACG, which is kind of the middle market private equity world for a number of years. You know, private equity was not talking to company. I mean, they would say 10 million in EBITDA, right? Susan, 10 Million and above. They really say we’re looking at 20 now, companies approaching $2 million in EBITDA. One to $2 million are being approached by private equity, and that means there’s not only do companies face these monumental challenge of, how do I get to financial scale, but they’re now dealing with the capital markets that are saying, I’m going to buy all your competitors. How are you going to compete with me? Or I’ll buy you right and and that is an enormously consequential decision for a founder and so, so effectively, it all started with a data set and then moved into actual anecdotal information, and now 10 years ago, after tracking it for the last decade, every year, by the way, there’s no doubt that this is a gravitational force that will not go away for The next 20 years, certainly next 10 to 15 years. And so that’s kind of where it came from, and so that that is hugely consequential to a founder that didn’t have to deal with that, you know, 10 years ago. So I know you’ve seen it because we’ve talked about it, but that’s the background.

Susan Kearney  8:00

Yeah, it does seem to me like over the course of my career, particularly last 15 or 20 years, the plethora of PE firms, just the sheer number of them, the size of their funds, you have to go down market right in order to find deals and opportunity.

Doug Tatum  8:17

You just, you just summarize the point I missed to make, private equity has a trillion dollars. Trillion dollars with a T. I mean, that’s even big money in government terms, yeah. What entrepreneurs might not realize is, I mean, one of the things that it’s interesting is, how do private equity get how do they get paid? You know, what is their what they call the LPs, their investors, what are their commitments? Their commitments are 10 years. So I’ve talked to private equity firms now that have LP commitments for 20 years. And so this money is not temporal. It’s locked in for a decade, and and they cannot get rid of that money in the middle market, and so that’s why they’ve diverted. I love to tell everybody I predicted this, which is, you know, stretching the truth. But what happened is, when you see it year after year, you start calling it out. Then you can say you predicted it, which really you didn’t, you just described what was happening and, and that’s what’s going on, is too much money chasing too few deals, and the new normal is when you have enormous amounts of capital and And historically, relatively low interest rates, right? Which the combination therefore, is that the the cost of capital and the amount of capital literally lays out a case for the fact that you can buy customers cheaper than you can win them the old fashioned way and a heck of a lot faster. So. And so the data shows that in the last 20 years that we’ve been looking at this data, in the last 10 years, 25% of the middle market is gone. One quarter of all the companies in the United States have been consolidated in the middle market. And so they are now deep then now they’re now they’re diving down into this, no means land area, which is who we’re talking to right

Susan Kearney  10:28

now, yeah. And it’s across all industries, as you mentioned, you know, things that we 20 years ago never have imagined, plumbers, electricians, H back, dry cleaners, you know, kinds of businesses,

Doug Tatum  10:41

medical practices, medical practices, which is remarkable. Accounting firms are being rolled up. And I’m not saying it’s negative. I mean, in some respects, the founders have to understand that now they have to assess strategically the impact are they? Are they going to face competitors that have financial scale such that creates an enormous competitive advantage to where they are? How do they situate within an industry that’s being rolled up and compete? Do they need to jump on that train? And that’s just that’s a really, really difficult decision that has, you know the consequent, not so on one side, you don’t know what you’re competing against when they’re and by the way, too much money chasing too few deals can create some really stupid things in an industry. I acknowledge that. But at the same time, there’s more money out there to reward founders than there ever has been at prices that have never been since you and I have been, you know, working with companies that are trying to, you know, trying to figure what they’re going to do out

Susan Kearney  12:00

Yeah, and as I see with the business owners I’m talking to, and I sure you have to Doug, the vast majority of their wealth is tied up in that business. And so as they age out and want to retire or travel the world or have health issues, they’ve got to find a way to get that wealth out. And hence, so many of them are thinking about and trying to understand this Pe world.

Doug Tatum  12:25

Well, again, you’re you know, you always have a way of getting to the crux of the matter. As a founder, there’s a point where you have to step outside of that role and look at yourself as an investor in your own business. And so now you’re going to be looking at your the vast majority of your wealth, and saying, Okay, that’s an investment. What? What do I do with it? What’s the risks involved? But you’ve got to understand this new normal. And unfortunately, you know, the world is full of panels of people talking about, let me help you sell your business. Let me do this. And the reality of is, it’s there’s a power dynamics problem, because, you know, founders are really, really smart people. But when they when they get around folks that you got to remember, Mr. And Miss founder, who might be listening to this, everybody’s gonna make a lot of money on a deal, just to start with, the fact that they all have an incentive to see things happen. So the So, the reality of it is, how do you, how do you get to the truth of the matter to make those strategic decisions, because they’re going to talk in code, quality of earnings reports, you know, reps and warranties, reps and all these terms. It’s like the first time I sat in the Pentagon years ago. I went through two hours of meetings, and I, like said, somebody’s got to get me a translator. Everything’s acronyms, you know. And so I’m a reasonably smart person, but they, I don’t understand what went on in here, right? Yeah. And so, so that’s where the founders find themselves. Is, is, you know, facing something that typically they wouldn’t have faced to 1015, years ago at all, unless they got a lot larger. But now they’re, they’re, they’re facing those decisions.

Susan Kearney  14:28

Yeah, so as a founder, kind of owner operator, they’ve already got enough on their plate, right? It’s chaos. They’ve got lives, plus they’ve got talent leadership teams to build and market alignment for product and financial stuff. They got all that stuff as they grow, but they need to find some how to to start to learn about this and keep it in mind. How does it? How does a founder think about what you’ve just talked about, these capital markets as day to day they go about building their business?

Doug Tatum  14:58

Well, this is self service. In warning, I’m gonna put my FSU hat on. So because Susan helped me design some of this, we we did an experiment down in Miami last year where we put together some training to to equalize the power dynamics between the founders and the the experts. And the idea was, Can we do a deep dive and get get the founders up to speed in an environment where they don’t mind raising their hands and saying, you know, guys, you know. Let’s, you know. Give me some examples, et cetera, et cetera. And so FSU tasked me, by the way, we had 62 entrepreneurs fly down to Miami, and we put together a series of experts and tested material, which included, by the way, private equity firms. And the interesting thing about it was a Florida State University executive education program, so nobody could write a check to get in there. We chose who the adjunct instructors are going to be. So we’re going to, we’re running that. We’re going to test that out. And in DC, your area, Atlanta and LA in a very small graduate level class, 15, maybe 20 participants. And what we do is we, we, we built material that allows the CO instructors, we’re going to call them the adjunct faculty, to do deep dives, whether it be a CPA firm, an investment banking firm, a commercial bank. You know, we understand that private equity leverages companies. What does that mean? Is that dangerous? Is that good? What’s the second bite of the apple? You know, the investment banking side, you know, what’s involved with a process? Can I do a targeted process? What if I know there’s two companies I want to buy my company? How do I deal with that, as opposed to letting the whole world know I’m for sale? Those kind of issues? And we did a very interesting thing. We set out, I know you were part of this too. Was kind of fun. We did an experiment. We sent out the participants. With private equity firms, for two and a half hour meals, and we changed that dynamic. Now the private equity firms themselves are sitting there, and they might have had a portfolio company CEO, and they’re thinking, and they’re saying, All right, here’s here’s the worst deal we ever did, and why? But it was a two hour process where you can ask questions, and you’re not you’re not intimidated around the nomenclature, you know? And then one of the things we learned about that was that that and we’ve incorporated into this new capital market readiness program, it’s just not about selling your business. It’s about being capital market ready. Are you going to keep going? Do you need a financial part? Do you need to jump on a train as an add on? What are the decision processes? Who are the experts that I have to bring in? What do they bring to the table? How are they incentivized? Details like, Okay, y’all talk about quality of earnings reports, accounting firm is going to literally say, here’s an example of a couple of you know, what, how much stresses I put on my accounting stand. When do I need a CFO? When do I need a part time CFO? And do I need a full time CFO? You know, everything around what kills deals, what makes deals go well from the investment banking standpoint? So, you know, I think we’re driven, I’m driven to to, I was an enctrepreneur. I went through the process myself, you know, we built a firm and sold it, and I’m in that world, and it’s intimidating. So, so, you know, I think we kind of have a mission to get that education out. It’s a it’s two days, very intense on a Monday, all the way through the evening, all the way through a reception on a Tuesday. It’s very intense graduate level thing that FSU is putting together, and we’re going to test that in those three locations and see where it goes. But I just it is a new normal, and founders have got to get more sophisticated. I really believe that now, whether we have the way to do that, we don’t know yet, but we’re going to give it a try.

Susan Kearney  19:35

It was interesting. Over the course of those two days, you could feel in the room the first morning, almost two sides, right, the entrepreneurs and the PE firms, and very candid conversation about those markets and the brands of PE firms and so on. And over the course of two days, the founders got a little more confident. The PE firms had to be a little vulnerable. And I think that. Things were switched up a bit. And I know talking to people who left, they thought it was a great experience, but also talking to people who were there, one of the questions that they really were looking for clarity about that I’m going to ask you, to tell us is what, what is a platform and a tuck in? And how do I think about my business, and do I, do I decide I want to be one or the other, or am I just that when I get ready to go to market? Like, how do they think about that important decision?

Doug Tatum  20:32

Well, first of all, I think that that that is probably the decision, that decision is the critical one. Because if you’re too big to be small, too small to be big, you know, in fact, this course we use, we integrate a case around somebody, an entrepreneur, a real, live one that was in No Man’s Land, okay? And so they face critical decisions about infrastructure. You know, everyone listen to this. If you’re in that if you’re in that range, you realize sometimes you got to put in more infrastructure than you can afford before you get there. If you get on the other side of that infrastructure, the capital markets open up, debt markets open up there. But during that transition, you’re building the ability to grow at scale, financial scale, and that’s a very difficult transition. That’s a platform. A platform is somebody that has built the management team and the infrastructure to scale financially, geographically, customer wise, maybe even internationally. And so those are platforms. That’s, that’s what a private equity firm will fund. In fact, I have actual models that we show from private equity firms. By the way, they can’t write a check to get in here. Nobody can. We choose which firms we bring in based on their willingness to open the kimono, so to speak, but the the step fixed cost, we can show you actual models where the revenues are just beautiful. The EBITDA is going up, but then you have this huge jump in infrastructure costs to get to the other side, and so that sometimes can be done internally, but you want to know that you’re doing it for a reason. Yes, the alternative to that is that you’re down below there, and you go, I’m not willing to take that chance, or I can’t do it fast enough, and I might be in a competitive environment where, where these larger scales up organizations are going to beat me, cost wise, for some reason, or whatever the case may be. And therefore, what I’m really selling is my customer set. A perfect example would be, I’m going to build a channel. I’m going to create a world class sales organization, because I’m going to use that to grow and expand. And then, if you’re an add on, an add on, a larger company in that business, I don’t need that. I already have that. What I need is your geographic location, right? You know. So I just need everything you got, and do not go out and spend a million dollars on an ERP system, because when I buy you, you’re going to lock on to my infrastructure. I’m not going to use your infrastructure those kind of things. So those are the kind of things that differentiate what you would call a platform and a tuck in. A tuck in meaning an acquisition that you tuck into a platform. And about 80% of all the deals in the United States right now are tuck ins or add ons. And then I have some data that shows 67% of all acquisitions are with companies that have less than 100 employees. That is unheard of. 10 years ago, 15 years ago, yeah, yeah.

Susan Kearney  24:10

67 six. 7% 67%

Doug Tatum  24:14

of all acquisitions by private equity deals were for companies less than 100 employees. So so some of our listeners out there are sitting there going, Yeah, I’m getting calls every day, and I’m not even sure what in the hell is going on. Well, you might be targeted as a as a tuck in or an add on, or you might want to do the work that gets you as a platform, because the valuation issues are significantly different. And then there’s a lot of discussion about, okay, how much cash do I get? And then what’s the second bite of the apple? Everybody talks about maximizing or EBITDA. Nobody talks about, well, am I actually joining up with some place where. Second bite of Apple could be more than what I originally sold the firm for. How do you assess those kind of things? I mean, these are big deal issues. And as you pointed out, the the the biggest. How would I say this competitor, the biggest obstacle for a founder is the tyranny of the urgent. In other words, I got all these things to deal with, but you can’t outwork bad strategy, right? And you’re into a gravitational pull that is unfamiliar, and therefore you’ve got to get a handle on that, or you could make a mistake and find yourself gradually losing your investment, losing value over time, right?

Susan Kearney  25:56

It’s almost like, you know, couples are always waiting for the right time to have children? And there never is one.

Doug Tatum  26:04

It’s a great, right? Great. That is a great user if you’re totally prepared to have children and it’s probably too late, it’s probably too late. Exactly, yes, yeah. So it is yes. Great illustration.

Susan Kearney  26:16

Never a perfect time to decide to learn this and then exit. The perfect time is when you don’t have time for it, because you have

Doug Tatum  26:24

to, well, that’s, yeah, that’s why we call it capital market ready. Not capital market sell, not capital market, do acquisitions, not capital market, add on. We’re saying get capital market ready. What does that mean? It starts with getting educated, and that’s what we

Susan Kearney  26:40

put together. Perfect, perfect. Thanks for that, Doug. One last question, then I’ll let you go, and that is, what about for owners that aren’t thinking of exit so much as just needing a growth partner, is this conversation? Is it important?

Doug Tatum  26:56

That’s another great question. I mean, if you’re looking at as an investor. And I was just on the phone with a company consulting firm. I won’t get into the details of it, but you know, he was going, you know, I’m having a lot of fun, making a lot of money. I’m going, you know, two years ago, he was losing money. Now he’s around 10 million in EBITDA, and he’s going, I wonder, I think I’ve figured out how to align what I do in a very unique way. We’re going to do 44 million bucks a year this year, and maybe I take some chips off the table. But I don’t want to not lead this thing to the next level. That’s a platform. And so, so, so, and then you got family companies, and you go, Look, you know, am I handing my? Am I handing my, my next generation, a business that’s strategically handicapped, or how do I position it where they can take it to the next level? And do I need? Do I need a financial partner? Does it make sense to have a financial partner to de risk that for everybody. I will never forget in the book, No Man’s Land, sitting with, I think it was a fourth or fifth generation. Might have been fifth generation company in the freight forwarding business. I can share it because it’s in the book. I didn’t give the name. You know this, I remember going into the Susan, going into the the panel boardroom, and, you know, you got great granddad. You got granddad, you got dad and every aunt in that town was like living off this business, right? And you could just hear the echoes, you know, them talking to this young, this son, who is now leading this thing going well, your great granddaddy got it through the Great Depression. What’s your problem? My dividend went down 30 cents. Well, what we did is we pulled some data and showed him that everybody made money in one point port, and everybody made money at three or more ports. But if you were in two ports to three ports, you were stuck in it, too big to be small, too small to big. Nobody in the industry made money, right? He got tears in his eyes, because what he had done is he had, he had, he had ratcheted up his overhead and was out of capital and get to the next side. He would have been better off to get a financial partner and do acquisitions to get there, or he would have been better off to stay small and maybe sell to somebody who was already there. But what he didn’t realize was that FedEx and UPS had gotten the freight forwarding business, and therefore they had infrastructure you had to compete with if you were at more than one port. One or because at one port, you know everybody in the port, and you give them Master’s tickets, so you get anything done you want to get done. You go to two to three ports, and you got to have an infrastructure in place. He bought the infrastructure and was not making any money. And it was, it was brutal, because the pressure in a family business is just brutal for

Susan Kearney  30:23

something like that. Yeah, wow, that’s crazy. That’s a good lesson. Any last thoughts before we wrap up? No, I

Doug Tatum  30:33

appreciate you and all your help in designing this course on behalf of FSU, and we’re going to see where it goes. We’re going to work hard at trying to get this out to founders

Susan Kearney  30:44

and Doug. Where can people buy your book? If they are inclined to read

Doug Tatum  30:48

it’s on Amazon, they can get it on Amazon. Okay, yeah, the course is a lot more important than the book.

Susan Kearney  30:56

Yeah, I’m going there next. How can people learn more about the course?

Doug Tatum  31:00

You could go check in to FSU, Google, FSU capital market readiness, and you will find information on that course. Certainly you can that would be the easiest way to do it. It’s set up to apply. It’s an application that we you know, FSU goes through an application process. It’s simple, you have to answer some questions, we’ll make sure that you know you need to be approaching, you know, million to 2 million in EBITDA, we want everybody in that room to be in kind of the same situation, and once you’re approved, then you can register for the course.

Susan Kearney  31:36

Sounds great. Thanks so much. Doug, I really appreciate your time. It’s always great to talk to you.

Doug Tatum 31:41

Thank you, Susan, appreciate it. Bye now.

Outro 31:49

Thank you for listening to the Growth + Exit podcast sponsored by Newport, a unique national business advisory firm. If you enjoy this sho

Intro  0:06

Welcome to the Growth + Exit podcast where owners of privately held middle market companies talk about founding, scaling and exiting their businesses successfully. Learn how to maximize and monetize your business on your own terms. Let’s get started.

Susan Kearney  0:30

Hi, I’m Susan Kearney, host for the Growth + Exit podcast, where owners of private companies tell their stories about founding, scaling and sometimes exiting their businesses. The podcast is brought to you by Newport LLC. Newport is a cadre of business builders, business founders, business owners who work as partners with middle market owners to help them with scaling the business, with de risking it and with sometimes taking it to market. For example, we had a government contractor who we helped build his business more profitably and then sell for 13x multiple on his EBITDA today, on the podcast, we have Doug Tatum, yeah, if you’re a listener of our podcast, you know that we had Doug on about a year ago to Talk about his journey as an entrepreneur, founding, scaling and exiting Tatum a number of years ago, but Doug has more to talk to us about. You know, Doug is on the faculty at the Florida State University, Jim Moran College of Entrepreneurship, where he teaches entrepreneurs and students, of course, as well, about how to build businesses. He’s also the author of No Man’s Land, that was a four time Award winner for business book of the year, and is all about emerging growth companies and how they grow and avoid some of the potholes that they might get into. And he’s an expert at Capital Markets, and that’s the topic for today. We’re having Doug back to talk to us about, you know, the dynamics in the capital markets currently, particularly the lower middle market for private company owners. What’s going on there? What’s different? Why should owners pay attention and so Doug, thanks for coming and being on the podcast with us today.

Doug Tatum  2:16

Well, thanks for including me as always. And I am a faculty member at FSU. We used to be known for football. So if anybody out there has a son that can throw a football through a brick wall, please contact me or Susan directly, and we will have a discussion. Anyway.

Susan Kearney  2:35

We’ll find a donor with a million dollar checkbook to take care of that, right?

Doug Tatum  2:39

Yeah, you got it. That’s what. We might even have it. We might even have the money. Just contact us.

Susan Kearney  2:43

Yeah, exactly, exactly. Okay. So now, now you’ve done your duty as an alumni. We’ll move on to the business part of the show. I know how painful those football Saturdays have been for you guys for the past. Oh boy. So Doug, tell us a little bit to start with about how you how you came across this knowledge about capital markets. How did you build your expertise? What drew

Doug Tatum  3:06

you to the topic? So to start with those of you listening, we’re going to frame this around what Susan and I at Newport. I also am a partner and on the board with with Susan at Newport, we’re talking about emerging what I call emerging growth companies. Those are companies typically between 10 and 50 million in revenue. You might self identify yourself as being too big to be small, too small to be big, and that’s what I wrote about in No Man’s Land. And years ago, I raised a bunch of money from, I say I there’s a team of us that raised some money as academics from the NASDAQ Foundation and the Edward Loeb Foundation, and we built a time series database that’s up at the University of Wisconsin right now, and it tracks every company United States. And so a decade ago, we started seeing something uniquely different in those demographics, and then I connected that with the private equity world and some of the data, and obviously in my old firm, that was a huge chunk of our our revenue. So I was kind of connected that community. And so I got interested in it, and then the data said that there was a massive consolidation going on in the middle market and the and I don’t ever believe in data unless I talk to somebody like Susan, you who are dealing with, you know, companies in the middle of the capital markets. You know, it’s kind of like the blue book for the Fed. You go out and talk to real business people, compare that to the data, and what we were finding was a new normal. And that new normal is that private equity pretty well owns the middle market. You. You know, the data is shocking. When you see how few companies there are above 100 employees United States, I would guess that in companies and above 100 employees to 500 employees, private equity probably owns a third of them already. And so what? What happened was that private equity pointed their guns downstream. And so about 80% 75 to 80% of all the deals in United States right now are add ons. So think of it as a private equity firm has a platform company pick any industry. I mean, it’s in healthcare. It’s now in DOD in your backyard, HVAC. You know, they have a large HVAC company. They bought a platform that that company. They’ve driven through no man’s land. And now what they do is they buy customers, rather than grow them the old fashioned ways. That’s called an add on. Well, the reality of that is that when I first started dealing in private equity, and I was global chairman of ACG, which is kind of the middle market private equity world for a number of years. You know, private equity was not talking to company. I mean, they would say 10 million in EBITDA, right? Susan, 10 Million and above. They really say we’re looking at 20 now, companies approaching $2 million in EBITDA. One to $2 million are being approached by private equity, and that means there’s not only do companies face these monumental challenge of, how do I get to financial scale, but they’re now dealing with the capital markets that are saying, I’m going to buy all your competitors. How are you going to compete with me? Or I’ll buy you right and and that is an enormously consequential decision for a founder and so, so effectively, it all started with a data set and then moved into actual anecdotal information, and now 10 years ago, after tracking it for the last decade, every year, by the way, there’s no doubt that this is a gravitational force that will not go away for The next 20 years, certainly next 10 to 15 years. And so that’s kind of where it came from, and so that that is hugely consequential to a founder that didn’t have to deal with that, you know, 10 years ago. So I know you’ve seen it because we’ve talked about it, but that’s the background.

Susan Kearney  8:00

Yeah, it does seem to me like over the course of my career, particularly last 15 or 20 years, the plethora of PE firms, just the sheer number of them, the size of their funds, you have to go down market right in order to find deals and opportunity.

Doug Tatum  8:17

You just, you just summarize the point I missed to make, private equity has a trillion dollars. Trillion dollars with a T. I mean, that’s even big money in government terms, yeah. What entrepreneurs might not realize is, I mean, one of the things that it’s interesting is, how do private equity get how do they get paid? You know, what is their what they call the LPs, their investors, what are their commitments? Their commitments are 10 years. So I’ve talked to private equity firms now that have LP commitments for 20 years. And so this money is not temporal. It’s locked in for a decade, and and they cannot get rid of that money in the middle market, and so that’s why they’ve diverted. I love to tell everybody I predicted this, which is, you know, stretching the truth. But what happened is, when you see it year after year, you start calling it out. Then you can say you predicted it, which really you didn’t, you just described what was happening and, and that’s what’s going on, is too much money chasing too few deals, and the new normal is when you have enormous amounts of capital and And historically, relatively low interest rates, right? Which the combination therefore, is that the the cost of capital and the amount of capital literally lays out a case for the fact that you can buy customers cheaper than you can win them the old fashioned way and a heck of a lot faster. So. And so the data shows that in the last 20 years that we’ve been looking at this data, in the last 10 years, 25% of the middle market is gone. One quarter of all the companies in the United States have been consolidated in the middle market. And so they are now deep then now they’re now they’re diving down into this, no means land area, which is who we’re talking to right

Susan Kearney  10:28

now, yeah. And it’s across all industries, as you mentioned, you know, things that we 20 years ago never have imagined, plumbers, electricians, H back, dry cleaners, you know, kinds of businesses,

Doug Tatum  10:41

medical practices, medical practices, which is remarkable. Accounting firms are being rolled up. And I’m not saying it’s negative. I mean, in some respects, the founders have to understand that now they have to assess strategically the impact are they? Are they going to face competitors that have financial scale such that creates an enormous competitive advantage to where they are? How do they situate within an industry that’s being rolled up and compete? Do they need to jump on that train? And that’s just that’s a really, really difficult decision that has, you know the consequent, not so on one side, you don’t know what you’re competing against when they’re and by the way, too much money chasing too few deals can create some really stupid things in an industry. I acknowledge that. But at the same time, there’s more money out there to reward founders than there ever has been at prices that have never been since you and I have been, you know, working with companies that are trying to, you know, trying to figure what they’re going to do out

Susan Kearney  12:00

Yeah, and as I see with the business owners I’m talking to, and I sure you have to Doug, the vast majority of their wealth is tied up in that business. And so as they age out and want to retire or travel the world or have health issues, they’ve got to find a way to get that wealth out. And hence, so many of them are thinking about and trying to understand this Pe world.

Doug Tatum  12:25

Well, again, you’re you know, you always have a way of getting to the crux of the matter. As a founder, there’s a point where you have to step outside of that role and look at yourself as an investor in your own business. And so now you’re going to be looking at your the vast majority of your wealth, and saying, Okay, that’s an investment. What? What do I do with it? What’s the risks involved? But you’ve got to understand this new normal. And unfortunately, you know, the world is full of panels of people talking about, let me help you sell your business. Let me do this. And the reality of is, it’s there’s a power dynamics problem, because, you know, founders are really, really smart people. But when they when they get around folks that you got to remember, Mr. And Miss founder, who might be listening to this, everybody’s gonna make a lot of money on a deal, just to start with, the fact that they all have an incentive to see things happen. So the So, the reality of it is, how do you, how do you get to the truth of the matter to make those strategic decisions, because they’re going to talk in code, quality of earnings reports, you know, reps and warranties, reps and all these terms. It’s like the first time I sat in the Pentagon years ago. I went through two hours of meetings, and I, like said, somebody’s got to get me a translator. Everything’s acronyms, you know. And so I’m a reasonably smart person, but they, I don’t understand what went on in here, right? Yeah. And so, so that’s where the founders find themselves. Is, is, you know, facing something that typically they wouldn’t have faced to 1015, years ago at all, unless they got a lot larger. But now they’re, they’re, they’re facing those decisions.

Susan Kearney  14:28

Yeah, so as a founder, kind of owner operator, they’ve already got enough on their plate, right? It’s chaos. They’ve got lives, plus they’ve got talent leadership teams to build and market alignment for product and financial stuff. They got all that stuff as they grow, but they need to find some how to to start to learn about this and keep it in mind. How does it? How does a founder think about what you’ve just talked about, these capital markets as day to day they go about building their business?

Doug Tatum  14:58

Well, this is self service. In warning, I’m gonna put my FSU hat on. So because Susan helped me design some of this, we we did an experiment down in Miami last year where we put together some training to to equalize the power dynamics between the founders and the the experts. And the idea was, Can we do a deep dive and get get the founders up to speed in an environment where they don’t mind raising their hands and saying, you know, guys, you know. Let’s, you know. Give me some examples, et cetera, et cetera. And so FSU tasked me, by the way, we had 62 entrepreneurs fly down to Miami, and we put together a series of experts and tested material, which included, by the way, private equity firms. And the interesting thing about it was a Florida State University executive education program, so nobody could write a check to get in there. We chose who the adjunct instructors are going to be. So we’re going to, we’re running that. We’re going to test that out. And in DC, your area, Atlanta and LA in a very small graduate level class, 15, maybe 20 participants. And what we do is we, we, we built material that allows the CO instructors, we’re going to call them the adjunct faculty, to do deep dives, whether it be a CPA firm, an investment banking firm, a commercial bank. You know, we understand that private equity leverages companies. What does that mean? Is that dangerous? Is that good? What’s the second bite of the apple? You know, the investment banking side, you know, what’s involved with a process? Can I do a targeted process? What if I know there’s two companies I want to buy my company? How do I deal with that, as opposed to letting the whole world know I’m for sale? Those kind of issues? And we did a very interesting thing. We set out, I know you were part of this too. Was kind of fun. We did an experiment. We sent out the participants. With private equity firms, for two and a half hour meals, and we changed that dynamic. Now the private equity firms themselves are sitting there, and they might have had a portfolio company CEO, and they’re thinking, and they’re saying, All right, here’s here’s the worst deal we ever did, and why? But it was a two hour process where you can ask questions, and you’re not you’re not intimidated around the nomenclature, you know? And then one of the things we learned about that was that that and we’ve incorporated into this new capital market readiness program, it’s just not about selling your business. It’s about being capital market ready. Are you going to keep going? Do you need a financial part? Do you need to jump on a train as an add on? What are the decision processes? Who are the experts that I have to bring in? What do they bring to the table? How are they incentivized? Details like, Okay, y’all talk about quality of earnings reports, accounting firm is going to literally say, here’s an example of a couple of you know, what, how much stresses I put on my accounting stand. When do I need a CFO? When do I need a part time CFO? And do I need a full time CFO? You know, everything around what kills deals, what makes deals go well from the investment banking standpoint? So, you know, I think we’re driven, I’m driven to to, I was an enctrepreneur. I went through the process myself, you know, we built a firm and sold it, and I’m in that world, and it’s intimidating. So, so, you know, I think we kind of have a mission to get that education out. It’s a it’s two days, very intense on a Monday, all the way through the evening, all the way through a reception on a Tuesday. It’s very intense graduate level thing that FSU is putting together, and we’re going to test that in those three locations and see where it goes. But I just it is a new normal, and founders have got to get more sophisticated. I really believe that now, whether we have the way to do that, we don’t know yet, but we’re going to give it a try.

Susan Kearney  19:35

It was interesting. Over the course of those two days, you could feel in the room the first morning, almost two sides, right, the entrepreneurs and the PE firms, and very candid conversation about those markets and the brands of PE firms and so on. And over the course of two days, the founders got a little more confident. The PE firms had to be a little vulnerable. And I think that. Things were switched up a bit. And I know talking to people who left, they thought it was a great experience, but also talking to people who were there, one of the questions that they really were looking for clarity about that I’m going to ask you, to tell us is what, what is a platform and a tuck in? And how do I think about my business, and do I, do I decide I want to be one or the other, or am I just that when I get ready to go to market? Like, how do they think about that important decision?

Doug Tatum  20:32

Well, first of all, I think that that that is probably the decision, that decision is the critical one. Because if you’re too big to be small, too small to be big, you know, in fact, this course we use, we integrate a case around somebody, an entrepreneur, a real, live one that was in No Man’s Land, okay? And so they face critical decisions about infrastructure. You know, everyone listen to this. If you’re in that if you’re in that range, you realize sometimes you got to put in more infrastructure than you can afford before you get there. If you get on the other side of that infrastructure, the capital markets open up, debt markets open up there. But during that transition, you’re building the ability to grow at scale, financial scale, and that’s a very difficult transition. That’s a platform. A platform is somebody that has built the management team and the infrastructure to scale financially, geographically, customer wise, maybe even internationally. And so those are platforms. That’s, that’s what a private equity firm will fund. In fact, I have actual models that we show from private equity firms. By the way, they can’t write a check to get in here. Nobody can. We choose which firms we bring in based on their willingness to open the kimono, so to speak, but the the step fixed cost, we can show you actual models where the revenues are just beautiful. The EBITDA is going up, but then you have this huge jump in infrastructure costs to get to the other side, and so that sometimes can be done internally, but you want to know that you’re doing it for a reason. Yes, the alternative to that is that you’re down below there, and you go, I’m not willing to take that chance, or I can’t do it fast enough, and I might be in a competitive environment where, where these larger scales up organizations are going to beat me, cost wise, for some reason, or whatever the case may be. And therefore, what I’m really selling is my customer set. A perfect example would be, I’m going to build a channel. I’m going to create a world class sales organization, because I’m going to use that to grow and expand. And then, if you’re an add on, an add on, a larger company in that business, I don’t need that. I already have that. What I need is your geographic location, right? You know. So I just need everything you got, and do not go out and spend a million dollars on an ERP system, because when I buy you, you’re going to lock on to my infrastructure. I’m not going to use your infrastructure those kind of things. So those are the kind of things that differentiate what you would call a platform and a tuck in. A tuck in meaning an acquisition that you tuck into a platform. And about 80% of all the deals in the United States right now are tuck ins or add ons. And then I have some data that shows 67% of all acquisitions are with companies that have less than 100 employees. That is unheard of. 10 years ago, 15 years ago, yeah, yeah.

Susan Kearney  24:10

67 six. 7% 67%

Doug Tatum  24:14

of all acquisitions by private equity deals were for companies less than 100 employees. So so some of our listeners out there are sitting there going, Yeah, I’m getting calls every day, and I’m not even sure what in the hell is going on. Well, you might be targeted as a as a tuck in or an add on, or you might want to do the work that gets you as a platform, because the valuation issues are significantly different. And then there’s a lot of discussion about, okay, how much cash do I get? And then what’s the second bite of the apple? Everybody talks about maximizing or EBITDA. Nobody talks about, well, am I actually joining up with some place where. Second bite of Apple could be more than what I originally sold the firm for. How do you assess those kind of things? I mean, these are big deal issues. And as you pointed out, the the the biggest. How would I say this competitor, the biggest obstacle for a founder is the tyranny of the urgent. In other words, I got all these things to deal with, but you can’t outwork bad strategy, right? And you’re into a gravitational pull that is unfamiliar, and therefore you’ve got to get a handle on that, or you could make a mistake and find yourself gradually losing your investment, losing value over time, right?

Susan Kearney  25:56

It’s almost like, you know, couples are always waiting for the right time to have children? And there never is one.

Doug Tatum  26:04

It’s a great, right? Great. That is a great user if you’re totally prepared to have children and it’s probably too late, it’s probably too late. Exactly, yes, yeah. So it is yes. Great illustration.

Susan Kearney  26:16

Never a perfect time to decide to learn this and then exit. The perfect time is when you don’t have time for it, because you have

Doug Tatum  26:24

to, well, that’s, yeah, that’s why we call it capital market ready. Not capital market sell, not capital market, do acquisitions, not capital market, add on. We’re saying get capital market ready. What does that mean? It starts with getting educated, and that’s what we

Susan Kearney  26:40

put together. Perfect, perfect. Thanks for that, Doug. One last question, then I’ll let you go, and that is, what about for owners that aren’t thinking of exit so much as just needing a growth partner, is this conversation? Is it important?

Doug Tatum  26:56

That’s another great question. I mean, if you’re looking at as an investor. And I was just on the phone with a company consulting firm. I won’t get into the details of it, but you know, he was going, you know, I’m having a lot of fun, making a lot of money. I’m going, you know, two years ago, he was losing money. Now he’s around 10 million in EBITDA, and he’s going, I wonder, I think I’ve figured out how to align what I do in a very unique way. We’re going to do 44 million bucks a year this year, and maybe I take some chips off the table. But I don’t want to not lead this thing to the next level. That’s a platform. And so, so, so, and then you got family companies, and you go, Look, you know, am I handing my? Am I handing my, my next generation, a business that’s strategically handicapped, or how do I position it where they can take it to the next level? And do I need? Do I need a financial partner? Does it make sense to have a financial partner to de risk that for everybody. I will never forget in the book, No Man’s Land, sitting with, I think it was a fourth or fifth generation. Might have been fifth generation company in the freight forwarding business. I can share it because it’s in the book. I didn’t give the name. You know this, I remember going into the Susan, going into the the panel boardroom, and, you know, you got great granddad. You got granddad, you got dad and every aunt in that town was like living off this business, right? And you could just hear the echoes, you know, them talking to this young, this son, who is now leading this thing going well, your great granddaddy got it through the Great Depression. What’s your problem? My dividend went down 30 cents. Well, what we did is we pulled some data and showed him that everybody made money in one point port, and everybody made money at three or more ports. But if you were in two ports to three ports, you were stuck in it, too big to be small, too small to big. Nobody in the industry made money, right? He got tears in his eyes, because what he had done is he had, he had, he had ratcheted up his overhead and was out of capital and get to the next side. He would have been better off to get a financial partner and do acquisitions to get there, or he would have been better off to stay small and maybe sell to somebody who was already there. But what he didn’t realize was that FedEx and UPS had gotten the freight forwarding business, and therefore they had infrastructure you had to compete with if you were at more than one port. One or because at one port, you know everybody in the port, and you give them Master’s tickets, so you get anything done you want to get done. You go to two to three ports, and you got to have an infrastructure in place. He bought the infrastructure and was not making any money. And it was, it was brutal, because the pressure in a family business is just brutal for

Susan Kearney  30:23

something like that. Yeah, wow, that’s crazy. That’s a good lesson. Any last thoughts before we wrap up? No, I

Doug Tatum  30:33

appreciate you and all your help in designing this course on behalf of FSU, and we’re going to see where it goes. We’re going to work hard at trying to get this out to founders

Susan Kearney  30:44

and Doug. Where can people buy your book? If they are inclined to read

Doug Tatum  30:48

it’s on Amazon, they can get it on Amazon. Okay, yeah, the course is a lot more important than the book.

Susan Kearney  30:56

Yeah, I’m going there next. How can people learn more about the course?

Doug Tatum  31:00

You could go check in to FSU, Google, FSU capital market readiness, and you will find information on that course. Certainly you can that would be the easiest way to do it. It’s set up to apply. It’s an application that we you know, FSU goes through an application process. It’s simple, you have to answer some questions, we’ll make sure that you know you need to be approaching, you know, million to 2 million in EBITDA, we want everybody in that room to be in kind of the same situation, and once you’re approved, then you can register for the course.

Susan Kearney  31:36

Sounds great. Thanks so much. Doug, I really appreciate your time. It’s always great to talk to you.

Doug Tatum 31:41

Thank you, Susan, appreciate it. Bye now.

Outro 31:49

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