In this episode, we have our guest Nick Jackson from The Mendota Group, who discusses. What lifestyle brands can do to enhance their value for strategic buyers. He also discusses what founders can learn from CEOs who typically manage the business acquired by PE firms. Finally, he touched on why they put a negligible value on technology when you buy lifestyle brands.
- [0:00] Intro
- [2:28] Personal journey and current focus
- [4:05] Perspective on growth
- [5:53] why talent is important for a growing company
- [10:12] Ideal company for a strategic buyer
- [15:31] Factors why companies are in the market for buyers
- [20:08] Why do buyers put a negligible value on the ERP systems
- [24:14] What founders can do to increase the value of their company
- [27:02] Closing thoughts
- [31:17] Outro
- Employees are just a critical part of executing our strategy. These manufacturing companies are relatively complex, and they can’t be made successful with just a handful of people at the top figuring things out. So we want people again. We want our employees to feel like they understand the direction we’re headed, that they understand the financial and strategic expectations of the business. And we want them to feel like their position is very key to that whatever role they have.
- We really look at what’s the customer concentration, we really don’t want to see one customer be greater than, let’s say, 25% of the revenue unless there’s a really, really good reason for that concentration.
- We want to know that there are customers who the business has worked with, that are name brand decent-sized companies that we feel with some more specific and directed sales effort, we could, we could get deeper and more involved with those customers to grow the business because we all know that growth, the easiest growth comes from growing your existing accounts versus trying to win new.
- Make sure you understand exactly why you make money, you have to be able to demonstrate to somebody on the outside where the profitability is, why it’s existed, why it’s sustainable, and why it’s going to continue at a level that is, you know, at current levels are better.
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Nick and his partner started The Mendota Group in 2000 with a focus on acquiring small to medium-sized manufacturing companies. In the last 20 years, Nick has worked on 19 different acquisitions which include all aspects of due diligence, negotiation, and financing of these transactions. Nick works closely with the management teams of their current holdings to help develop and implement strategies for growth. These companies collectively represent over $150MM of revenue and more than 750 employees.
Nick Jackson 0:00
No, no one wants to buy a company where even though it was a million bucks for 5-6-7 years, then all of a sudden something happened in the market where popped up to $2 million. But that thing that created that pop is something that’s not sustainable, not predictable.
Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.
Sam Gupta 0:54
Hey everyone, welcome back to another episode of the WBS podcast. I’m Sam Gupta, your host and principal consultant at a digital transformation consulting firm, ElevatIQ.
Business buyers have a unique way of evaluating businesses. If your end goal is to sell your business, you may want to know what buyers value in a business as an asset to align your growth plans with their needs. Do buyers put more value on the team or the rest of the clients? Do they emphasize more on technology or products? When do you get a higher return on homegrown software or an off-the-shelf ERP?
In today’s episode, we have a guest Nick Jackson from the Mendota group, who discusses what lifestyle brands can do to enhance their value for strategic buyers. He also discusses what founders can learn from CEOs who typically manage the business acquired by PE firms. Finally, he discusses why they put a negligible value on technology when they buy lifestyle brands. Let me introduce Nick to you.
Nick and his partner started the Mendota Group in 2000, with a focus on acquiring small to medium-sized manufacturing companies. In the last 20 years, Nick has worked on 19 different acquisitions, which includes all aspects of due diligence, negotiation, and financing of these transactions. Nick works closely with the management teams of their current holdings to help develop and implement strategies for growth. These companies collectively represent over 150 million dollars in revenue and more than 750 employees. But that, let’s get to the conversation.
Hey, Nick, welcome to the show.
Nick Jackson 2:24
Sam Gupta 2:28
All right. So, just to kick things off, do you want to start with your personal journey and what you are focusing on these days?
Nick Jackson 2:35
Sure, yeah, that’d be great. My name is Nick Jackson. I’m co-owner of a firm called the Mendota group. We’re a private equity firm based out of Madison, Wisconsin. We are what’s referred to in the industry as a funds sponsor, which means we do acquisitions of small manufacturing companies. We, my partner, and I invest our own personal capital and all those transactions, but then we partner with other capital providers to buy out those companies.
Our focus in the last 20 years of doing this has been looking for what we refer to as lifestyle companies that are in the range of a million to 3 million of cash flow, typically 10 to 15 million of revenue. And, you know, our focus is to kind of come in, provide the entrepreneur a transition to a different phase of their life, and then take a controlling interest in the company and work closely with the management team that exists there to kind of improve the company and move it from a lifestyle-focused business and move it more toward growth and, and profitable business for the future.
So we’re always excited to talk with any entrepreneur owner who’s not only looking for a way to sell their business but looking for better, better investors that can come into their business and help their team to grow into the future.
Sam Gupta 4:05
Okay, that’s very interesting, and I want to dig deeper into that. But before we get there, I had one comment. I appreciate you guys because you guys actually are sort of the catalyst for growth. And that’s the purpose of this podcast. Okay. We focus a lot on growth. So in your opinion, Nick, what is your perspective on growth? What does growth mean to you?
Nick Jackson 4:28
Well, it means to us as professional investors growth means two things. The obvious one is if we grow a company, the value of the company grows, and we as investors see an increase in the value of our investment. That’s the obvious one. But the more important one in my mind is if you have growth of a business and profitable growth, not just top-line growth, for the sake of creating more activity, but if you have profitable growth in a business, that requires a very, very clear strategy. It requires lots of challenges to be tackled.
And, lots of activities to be executed to really have growth. And so we believe that a company that is on a path of very, very strategic and deliberate growth will do a great job of attracting and retaining great talent. People don’t want to necessarily work at a company that’s just doing the same business for ten years. People want to be part of a winning team. And people want to come in and be challenged in their positions. And I think, you know, growing companies and working hard to win in markets is a big part of that. So we think growth is a big part of attracting and retaining great talent.
Sam Gupta 5:53
Okay, so that’s a very interesting point there. And I actually wanted to cover that later in the interview. And since we are already on that, so I want to cover that now. So why is talent so important for the growing company? And why do you believe that lifestyle businesses, and you refer to some of these starting businesses as lifestyle businesses, and I have seen a lot of other people referring to it as lifestyle businesses? So why is talent so important? And why do you believe that you guys are better positioned to attract the talent as opposed to the founders?
Nick Jackson 6:33
Yeah, well, I think, you know, as many people say, people are, are the foundation of a business, they really are especially a manufacturing business, we have many key people that are helping us make our product and get it, get a high-quality product out the door on time, every day. And then we have all the people you know, outside of our shop floor, who is helping to organize and, and be prepared to manage our financials and, and handle customers and deal with sales.
So employees are just a critical part of executing our strategy. These are, these manufacturing companies are relatively complex, and they can’t be made successful with just a handful of people at the top figuring things out. So we want people again. We want our employees to feel like they understand the direction we’re headed, that they understand the financial and strategic gets expectations of the business. And we want them to feel like their position is very key to that whatever, whatever role they have. And if they feel that they understand what they do and how it fits into our strategy, then we think they’ll be more excited about being on the team and moving us forward.
Sam Gupta 7:43
Okay, interesting, so you touched a little bit on the value of the company, and value could mean a lot of different things to a lot of different people. You touched a little bit on the revenue and cash flow as well. But right when you buy these companies, what do you look for in terms of value? Do you have any specific KPIs that you’d like to look for?
Nick Jackson 8:02
There are some very traditional valuation metrics that we use in the industry. You know, most in this part of the world, most people value the business on a what’s called EBITDA, which is earnings before interest, taxes, depreciation, and amortization. Or essentially, it’s a rough estimate of the operating cash flow of the business. And most people, most firms will look at some multiple of that value or the of that cash flow as a way to kind of set a valuation.
But then there are lots of other statistics, like how what kind of CAPEX is required in the business? And how consistent has that cash flow been over recent years? So you know, we use those metrics as kind of a quick early indicator of what do we think this business is generally worth? And then we use, you know, more detailed information, we gather and diligence to say, to what extent do we want to be at the upper part of that range or the lower part of that range?
Sam Gupta 9:00
Okay, interesting. So have you seen any specific red flag that you typically notice when you look at these companies that no, no, no, no, no, this is not the company? I definitely want to talk to you?
Nick Jackson 9:12
Sure. Yeah, there’s, you know, there are numerous times where we will begin the process of, of being engaged with a company, and we’ll look at their financials and learn about their earnings and start to get our head around what we think an evaluation is and one of the real obvious red flags is if we can find out that the earnings they recently had are somehow an anomaly to history.
No, no one wants to buy a company where even though it was a million bucks for 5-6-7 years, then all of a sudden something happened in the market where it popped up to 2 million, but that thing that created that that pop is something that’s not sustainable or predictable or stable for the future.
So that’s a big part of our early on processes, digging into the future. financials and digging into the reasons why the company’s performance is what it is and trying to draw conclusions about if we think that’s sustainable and something that we feel we can invest in long,
Sam Gupta 10:12
Okay, so I like to make the analysis comprehensive, okay. And I like to look at both perspectives. So the positive and negative, so let’s say, and my friend, Curt Anderson, and we did an interview with him as well. And he likes to refer to this as a soul mate.
So let’s say if you were looking for a soul mate here in terms of your company, in terms of your dream company, okay, what is going to be some of the metrics that you are going to look at on the balance sheet and financial statement? So let’s say if I’m trying to, you know, propose myself as your soul mate, Nick, and I’m presenting my financial statements to you. Okay, so how do you think I’m going to be your soul mate? I mean, what are some of that criteria?
Nick Jackson 10:47
Yeah, as far as specific metrics and financial metrics.
Sam Gupta 10:51
So let’s say if I showed you my financial statements, right at this moment, okay, and you are going to be like, you know, what, I am going to come after Sam because this is my dream company. Okay, I’ll do anything and everything to please them and get this done. Yeah. What is that dream company for you?
Nick Jackson 11:06
Well, Dream company for us is anybody that is any company that’s north of a million dollars of EBITDA, okay, closer to 2 million would even be better. But anything greater than a million dollars of EBITDA, we would prefer that that business that their EBITDA percentage is better than 10% of revenue. You know, we don’t like necessarily to participate in businesses that are very low margin, but very high volume, not to say those are bad businesses, but those don’t just don’t fit our skill set.
So we’d like to see a situation where somebody does at least 10% of their revenue. And then as far as the rest of the metrics go, it’s really looking at one of the particular things we tend to look at is how much of the company’s revenue exists as profitability after you take out variable material costs for the business because factoring a large part of the business is material.
Nick Jackson 12:01
Yes, we look at that revenue minus variable material cost as what we call material margin. And we like to see that be a fairly robust percentage, usually over 55%, if possible, because then that leaves plenty of room for the rest of the business with people and SG&A and costs, things like that, to still maintain good profitability.
And then you know, after that, after we’ve kind of determine those kinds of basic financial metrics, and we really look at what’s the customer concentration, we really don’t want to see one customer be greater than, let’s say, 25% of the revenue unless there’s a really, really good reason that concentration valuable, we want to know that there are customers who the business has worked with, that are name brand decent-sized companies that we feel with some more specific and directed sales effort, we could, we could get deeper and more involved with those customers to grow the business because we all know that growth, the easiest growth comes from growing your existing accounts versus trying to win new.
Nick Jackson 13:02
And then, you know, I think the last is kind of looking at the salary and compensation structure throughout the business, and just making sure that you know, things are in line, that there’s good equity and consistency across the business. And that, you know, there’s some good rationale to how people are paying and compensating their employees.
Sam Gupta 13:23
Okay, and do you pay attention to historical growth as well? I don’t know how many SMBs are or can claim that they are going, let’s say 10% 20% every year? I don’t know if that is even feasible. So do you look at that?
Nick Jackson 13:37
Yeah, you know, interestingly enough, that I think even small manufacturing companies can claim that type of growth, because oftentimes, you know if you think about it if we’re buying a company, that’s 15 million in revenue, and million and a half to 2 million of EBITDA, it’s likely in a market that’s very, very large. So if you’re a $15 million revenue company doing some type of metal forming or other product, there’s that market is huge.
Nick Jackson 14:07
And so doubling the business over the course of three to five years is not necessarily that outlandish, knowing that you’re still a very, very tiny piece of the market if you get the 30 million, so we look at historical growth to some degree so that we can understand what changed but again, by definition, we’re more interested in a lifestyle business.
And in that definition, the owner has achieved all of the financial success they want to achieve. The business is generating profitability and cash flow that meets the owner’s personal requirements. And so, by definition, the owner hasn’t really cared so much or really drove hard at growth. So we are looking for somebody that’s got a 15% pager because we know by definition, we’re buying a business that the owner didn’t care so much about that, and we’re hoping that we could come in for business with the management team on that kind of thing.
Sam Gupta 15:05
Okay, and so, what are some of the factors that these companies are trying to sell? Obviously, one of them is going to be, you know, the owner is competent, now they want to retire. That’s definitely one of the factors. What are some other factors that companies want to sell or want to hire you?
Nick Jackson 15:21
And when you say what they want to sell, you mean factors that they’re trying to tell us about in terms of why their businesses were buying or what they’re selling to their cause.
Sam Gupta 15:31
If they are in the market, they are there for a reason, either the growth has slowed down, or they don’t feel that they can grow by themselves, or, you know, the owner is just done, and they don’t really have a sustainable plan after that. So there must be a list of factors why these companies come to the market?
Nick Jackson 15:47
Yeah, I think most often, I would say that we’ve done 19 different transactions over 20 years. So I would say the majority of the time, the reason the owner is selling to us is that they’ve gotten to a point in their career, whether it’s what they’ve created wealth, or what their ages or what their family situation is, or whatever, they’ve gotten to a point in their career where they would like to kind of separate from the business and devote their time and financial resources to other factors, whether it’s retirement, whether it’s other businesses, whatever.
And so they’re looking for this transition out of the day-to-day operations of their existing business and to move into a different phase of their life. And the people that they have in their business are not able or capable of pulling off. Let’s call it a management buyout. So they need somebody to come in who can not only evaluate the business but as the wherewithal and the capital to be able to complete that transaction. And so that’s almost always the reason the person selling, Of course, they’re going to tell us about their company and why their team is great, and why their customers are great. And all those things that we evaluate in our due diligence process. But that’s almost always the instigator of somebody wants out, is just moving to a new phase of life.
Sam Gupta 17:00
Okay, interesting. So obviously, in your space, seeing people is not going to be as much of a factor in terms of creating that sustainable plan for the company. And when we look at the value of the company, people, process, and technology, these are going to be three factors on which you will evaluate. You know how much the company is going to be worth.
So in this particular case, let’s say if the owner or key executives want to retire, people are not as important. I would say, right, I mean, there are going to be other knowledge workers who you definitely want to retain. Otherwise, you might not be able to run the operations, right. But still, I don’t know how much price tag you are put on the people factor, but because you are going to bring the new audience who are slightly more capable of growing the company. So in terms of people process and technology, which is your biggest variable in terms of value. Can you touch on that?
Nick Jackson 17:50
Yeah, I actually would probably say that people and processes are the most important. Okay, technology may be the least important. And that may be confusing, but the reason I say that is, again, we’re trying to buy a company that has been stable and profitable but hasn’t been growth-oriented. So almost by definition, the amount of technology they’ve injected into the business over the last couple of years, whether it’s new machines or whether it’s an ERP system or whatever, is usually pretty diminishing because they haven’t felt the need to use that technology to support growth, because they haven’t necessarily cared about sustainable, significant growth.
So we put a lot of value on the people and the process. And what I mean by that is if a company has good processes in place, they not they may not be growth-oriented processes. But if they’re profit-oriented processes, meaning the team had a good way of maintaining profitability, even though revenues were fairly stable, that’s a reflection of a team that understands how to manage costs, how to keep pricing in place with customers, how to manage their purchasing process, right, those are all processes that are important to maintain profitability.
Nick Jackson 19:05
And then you know, we’re going to look at the people, and we’re going to evaluate all those people, because we’re going to keep nearly everybody in the business it we don’t ever go into a business buying it saying, Oh, these are all the people we’re gonna eject out of the business that just doesn’t happen. These are all great people. They’ve built nice, profitable companies. Some of them may not like our vision, so they may choose to leave over time, but we’re gonna keep the people, and so when we’re evaluating the people and setting our valuation, we know that these are people that can maintain the profitability of a business.
What we’re really trying to see is to what extent their people that can morph to our new philosophy of, hey, we’re gonna put this company on a growth path. And usually, we do have to bring in some others to kind of help bring an outside perspective, starting with a new CEO, but bring it outside growth perspective, but you know, we’re often evaluating most people to make sure they’re going to be excited about this new phase and be interested in, to, you know, join us on that new path.
Sam Gupta 20:08
Okay, so, we are actually going to touch a lot more on the technology aspect of this, because you mentioned that technology, you don’t put a lot of value, which is slightly counter-intuitive, in my opinion, most people would get that technology would have probably most dollars. And by the way, I mean, technology could be a lot of different things. And unless we are talking about the commoditized product here, then it’s a different case.
But technology could be your ERP system, it could be your machines, it could be your patents as well if somebody has paid, and I’m pretty sure you are putting a lot of dollars on that because that’s a fixed stream of revenue for you over the period of time, I don’t know, you know, how much expiration is going to be for parents, but typically that is going to be for like, you know, 17-30 years. So that’s, that’s a huge Jackpot for sure. So tell us, you know why you don’t put a value on ERP system. And I have seen lifestyle brands spending millions of dollars in building their unique processes. And I’m yeah, I’m hoping that they think probably they might be a software company, and they might be able to sell that out or, you know, millions of dollars, but you are putting $0. So tell us more.
Nick Jackson 21:18
Yeah. So first off, let me define technology in a couple of different ways. When we look at technology in a business, it kind of falls into three buckets. You know, as you say, the IP or product technology, our companies typically don’t have a robust set of IP. They’re not innovators, product developers so much. If it’s there, we would love it.
But that just hasn’t been very typical. These are fairly mature businesses. So a cutting-edge technology that translates IP is not real. The other technology is any technology for actually manufacturing the product, whether it’s machines, robotics, things to help with our quality systems, other automation, that kind of technology is very valuable to us. And to the extent that a team shows that they use it and not only use it to manage costs but use it to kind of convince their customers that they have a unique way of making the product and efficient manner that’s very valuable.
Nick Jackson 22:12
And then the last is really what you’re talking about ERP or other information systems inside the business. We would love it. And we’ve had some circumstances where the company we bought, the team was very, very plugged into the ERP system was using that data on a very regular basis to make good decisions about health and profitability. And to the end, we can tell from the day we start our due diligence whether people have a command of their data out of their ERP system.
So they do that gives us great hope and lots of good valuation we put on that because we know that team is really living by the data in their business. What we more often find, though, is that they use their ERP system for maybe basic accounting, a little bit of inventory, they don’t really use it for, let’s say, shop floor or scheduling or things like that. And what typically has happened is the invent the entrepreneur has been running the business for 15-20 years and has a complete command of everything about the business.
Nick Jackson 23:18
So if he or she is that intimate with the business, understands the margins, like the back of his hand, can do quotes on the back of an envelope, and understands you know, what’s broken in the business, if they get behind on shipment, that entrepreneur is not going to put a lot of value on an ERP. They certainly are not going to drop to $400,000 on an ERP implementation because they’re saying, I’ve run this business for 20 years, I know every aspect of it. And that’s great. And I don’t blame them for not investing in it.
But for us, when we come into the business, and we say okay, entrepreneurs moved on. Now we’ve got a management team that’s got to grow this business. And we got to decide where we want to invest capital and what customers and how we want to do, how we want to change pricing, and all these things that require good analytics and data having any ERP bringing an eventually any ERP system into that so that we all have better data is going to be really, really critical for the future. Okay,
Sam Gupta 24:14
So some of my audiences, obviously entrepreneurs, and as I’m pretty sure you would agree with me that they are super, super passionate, and as an entrepreneur myself and as entrepreneurs and lifestyle brand, we can do anything and everything. And we obviously work hard, right? Obviously, one of our goals is going to be to exit the company and probably maximize the number of dollars that we can get because these are our life savings, if you think about that, right?
So let’s say if you were us, what would be your advice from day one? Let’s say if I want to maximize the value of my company, I’m building a company, I’m building a manufacturing or distribution company, and I want to maximize the number of dollars that I can get as part of exit or as just a growing company. So what would be your advice?
Nick Jackson 24:58
Yeah, well, obviously the, as I mentioned earlier, maximizing the dollars of exit value is based on the level of your earnings. So that’s the obvious one is increased earnings. But that’s too easy. You know, I would kind of my advice to people as they’re thinking about an exit and preparing for an exit in our world is, first of all, make sure you understand exactly why you make money, you have to be able to demonstrate to somebody on the outside where the profitability is, why it’s existed, why it’s sustainable, and why it’s going to continue at a level that is, you know, at current levels are better.
Secondly, I think the more data so this comes back to the ERP question or other ways to have data for more data that people can provide to substantiate that conclusion of where their earnings are, and why, though, why they’ll continue that the more data, the better—so being really prepared with good solid data. And if they don’t have it today, start collecting it now.
Nick Jackson 26:01
So that they have it a year, and then the third thing I would say is to make sure that the team of key people, whether it’s the management team or other key people that they really understand. And they all agree with the conclusions that that entrepreneur has about why we make money and how that’s going to continue in the future. Because in the end, we want as buyers, we want to make sure that not only is the company profitable, but that everybody that’s critical on the team actually understands why they’re profitable and, and how they manage that, that they have a command of each aspect of their business.
And they can quote-unquote, manage that profitability. Not that they got a little lucky, a few new customers bought a bunch of stuff from them, and they had a little pop of earnings for a year. So it’s got to be intentional. And having the team be able to sit in the room with us and really explain where they make money and how their particular discipline or team affects that is really valuable to us.
Sam Gupta 27:02
Okay, so that’s it for today. Nick, do you have any last-minute closing thoughts by any chance that you might have for our listeners?
Nick Jackson 27:09
No, it was great, Sam. I appreciate the time. It’s been great to be on the show. And again, my advice to everybody is if you’re thinking about selling your business, and even if you’re in the evaluation phase, not quite ready to sell but want to talk to somebody who does this on a daily basis and want to learn about how to prepare, they can find me on the MendotaGroup.com. I’m happy to talk to anybody. I enjoy talking to entrepreneurs about their businesses. I have a lot of respect for the passion and the risk-taking that entrepreneurs bring to it and if I can be helpful to them as they’re evaluating the future exit, I would love to do that.
Sam Gupta 27:47
Okay, and I can attest to that. I mean, Nick is a fun guy. Everybody should reach out to him. It’s been a fun conversation so far. I have enjoyed our interaction. Nick, it’s been amazing. Thank you so much for your time. Really appreciate it.
Nick Jackson 28:02
Alright, Sam, thanks a lot. Have a great one.
Sam Gupta 28:04
I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learned something new today. If you want to learn more about Nick, head over to theMendotaGroup.com. Links and more information will also be available in the show notes.
If anything in this podcast resonated with you and your business. You might want to check other related episodes, including the interview with Damon Pistulka from Exit Your Way, where he discusses what buyers look for in a business while buying it from business owners. Also, the interview with Jim Gitney, where he discusses how the need for people processes and technologies change at each inflection point of business growth. Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure to get help. Thank you, and I hope to get you on the next episode.
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