How do you grow EBITDA from $8M to $100M in 7 years?

We 10x the EBITDA by basically just improving the business fairly substantially from 2016 to a 2023. What ultimately led to you to going out seeking outside capital as opposed to continuously funding everything internally? It's very easy to overvalue businesses by using hope as a strategy. You'll see folks put in a higher valuation on things because they hope they'll exit at a higher multiple than what they bought it at, kind of a greater fool strategy. In the world of cash flow and EBITDA, I'm curious, is there more cash flow than EBITDA, or is it less cash flow than EBITDA? How do you guys value cash flow in these equations? The short answer is Aaron, welcome back to 100 Million Dollar Exits. Today, we have Eric Wicklund with us, uh partner and managing director at Spayside Equity, a fund that is notable for creating value out of deals that might have been overlooked, uh specifically in the manufacturing space. Uh Eric, I would love for you to just go straight into the story of how the firm got started with its first deal, and kind of how that led to the subsequent deals that you guys have in the fund that you guys have today. Yeah, thanks a lot for having me, Jason. Uh yeah, the story of Spayside, uh the origin story, is one of acquisi- or entrepreneurship by acquisition. So, my partner, Kevin Dougherty, started the firm about 20 years ago, and it was a situation where he was uh working at Price Waterhouse Coopers, and a client of his uh asked him about potentially buying a company they were trying to sell after they had tried to sell it uh for over a year unsuccessfully. So, late late one night in Munich, Germany, uh he and uh the sellers hatched a plan for him to buy that business, and uh over a couple rounds of Scotch, uh which is why um you know, we have the uh the logo that we do. So, the blue is pays a little bit homage to the Bavarian flag that you find in Munich and then Space Side is a Scotch whisky producing area of Scotland and um based on being able to get that deal done with $300,000 from his 401k and then uh the rest debt. So, like a 99% debt equity ratio back pre-global financial crisis, he was able to start Space Side Equity and uh start investing in manufacturing businesses. Uh the kind of things we still do today. So, the you know, the history of the firm is one where we really like to find uh deals in misaligned ownership structures and structure them and then uh transform them in our ownership period and create value that way. And so, that's something I want to talk about. You know, you guys have this history and it's kind of all the rage of like how do you kind of get these sellers' notes that um can lead to these types of value creation. And I think for the audience's information, like can you help kind of give the scale of the types of businesses that you guys have transacted and how it's evolved over time? Yeah. Um so, now we really like to focus on 50 to $500 million revenue businesses with 2 million to 70 uh million of EBITDA. But, when we first got started, some of those businesses um early going might have been a little bit smaller. Nowadays, we have a bright line of we won't do anything below 50 million in revenue. You can make a lot of money uh you know, doing those sorts of deals, but you you also take on a decent amount of risk for the kind of deal that we like to do. And the kind of deal we like to do are often deals where, you know, we see an opportunity to execute uh what we call the fix and build strategy. So, phase one is improving it so that it's a scalable platform, improving the EBITDA and the EBITDA margins, and then phase two is a build or top-line growth uh focus with bolt-on acquisitions and organic uh activities to grow sales and revenue. But uh you know, in in the past, yeah, we we would do uh smaller deals and uh we had some that were, you know, phenomenal, ridiculous uh you know, returns and MOICs, IRRs, and MOICs. Um but you got to be careful doing those sorts of things because small things can kill small businesses uh as we all know. Often times because they don't have the scale in terms of people, uh processes, and systems to deal with challenges to the business. So, a small thing can create an insolvency issue uh in a small business. So, going forward, we still do what would be considered lower middle market or middle market uh manufacturing and value-added distribution businesses, again, 50 million to 500 million in revenue, uh where there's some opportunity to improve them, but um no longer do we do the sub-50-million-dollar microcap deals where uh transformation is needed. Now, we'll we'll do bolt-on acquisitions below that. Um and I would also argue that those deals, if it's a situation where it's a good company and a transformation isn't needed, you know, we would look at that. If it's just uh it's already running really well, and then we just need to do the second phase, which is more the growth phase, uh that's okay. But, if we're going to do fix and build, uh we don't go below 50 million in revenue. Let's talk about kind of how you guys got started though. Cuz now you have this bar, you know, you've earned the right, you've had success, now you can kind of go for those those bigger deals, you have the capital to do so. But for our audience to kind of understand like what it took to get there, like what were what was kind of that first, you know, the you know, first kind of deal where you really try to structure it in a way that kind of created this upside. Kind of give us some of the details of that. Yeah, the short answer is scrappiness and bootstrapping. Um so, there's a lot and and taking on like deals that you know, probably other people didn't really want to touch because they were hard, right? There was a you know, we could get by with like sweat equity and the sweat equity that we were putting into it was intellectual capital. It was like knowing how to get really difficult deals done and having the time to do it. Um and that that is hard. You're you're taking on a certain amount of risk and you need to show basically how how you can do that and then get it done and generate the returns. So, it's kind of one of those things like you know, think of it as I kind of think of it as like maybe like baseball or hockey. There's kind of like the minor leagues, right? Like A, AA, AAA and then like the majors. And so, you in private equity or entrepreneurism, you might play in those like lower leagues to start with earlier in your career and then you kind of like level up based on you know, showing the ability to do well in those situations. And honestly, I I would tell you that I think it's actually harder to do well in those lower situations cuz you don't have the same amount of resources and you and a lot of times calling capital you know, that part of the deal structure is a little bit difficult as well. So, like if you can kind of make it there, you can make it anywhere, but you know, the answer is you take on things that are you know, a little bit more challenging where your time can you know, be used as capital to get the deal done and get the returns and then you kind of level up from there and then get into like you know, bigger more institutional oriented investing as you go. And I think that is kind of the evolution that most people want to to have that experience especially if they don't have the means at the beginning of the time beginning. I guess when it comes to the that first deal you guys did and like the our deal like actually let's talk about I think it's Opta. Uh the bigger deals that you guys have done. All right, walk us through the journey of like how you identified that deal. What was kind of the deal architecture? And then what was that ultimately become because I think correct me if I'm wrong but you guys also launched a continuation fund dedicated specifically to that entity. Um which not necessarily a common play. So I'd be curious to kind of hear um how that worked, why you guys chose those decisions. Yeah, it's Opta is like the perfect deal to kind of explain like what we love to do. And the reason why I say that is you know, the uh I'm going to give you the conclusion first which is when we bought Opta way back in 2016 uh it had 7.8 million of EBITDA. And now 10 years later it has over 100 million of EBITDA. And a a lot of that was organic uh going from let's round 7.8 up to 8. So going from uh 8 to the to 85 which is when we exited into the continuation vehicle, that was all what we would call phase one activities. It was all actions. So that that was improving uh the EBITDA by improving the operations of the business, improving the EBITDA margins, uh growing very organically through sales force effectiveness, and launching new products and things like that. And then the the next journey in the continuation vehicle over the last few years here has been uh more about acquisitions and investing in new manufacturing plants around the world. Um so that uh you know, it's it's a tale of two phases. But uh what's great is like phase one, you know, we 10x the EBITDA by basically, you know, just improving the business fairly substantially from 2016 to 2023. And there was a merger in there that helped a bit as well. So, we put Optin and SKW together, but when those two businesses went together, they had like mid-20s of EBITDA, and then 3 years later had triple that. And that was all because we did that phase one approach, which was the operational improvement phase. And now in the continuation vehicle, we're doing the phase two part, which is the build part of it. So, we found that I think it's seven acquisitions in the last 3 years, and then we've opened five new manufacturing plants in Turkey, India, Brazil, Alabama, and the Toronto area in Canada. So, you know, a lot of a lot of organic growth along with acquisitive growth. And the continuation vehicle was set up to fuel that growth with the right cap structure to supply dry powder into those investments to grow the business. What does that company manufacture? Yeah, they So, it has three segments that they focus in. So, they they provide performance materials into metallurgical solutions, concrete and cement, and pulp and paper. And they don't you know, they don't make steel, they don't make concrete, they don't make cardboard, but they provide the added is and catalysts and reagents that make those things better. And were they manufacturing all of those things before you got involved, or did you guys add those through acquisitions and organic growth? So, the big thing that they did when we started with it was they did metallurgical solutions and they that business when we started with Opta really had three business units. It was metallurgical solutions primarily focused on steel. Um and then the second one was abrasives. And then the third one was a garnet business that was more of a trading business. Uh mostly used in like water wastewater treatment plants, water jet cutting, um and a few other applications. And it was kind of interesting cuz there were a lot of other PE firms looking at that deal uh when we ended up getting getting it. Interestingly enough, there was another uh private equity financial sponsor that had the deal um under LOI and exclusivity, but uh what ended up happening was they kind of angered the CEO uh of the parent company that was selling it off. And as a result, he uh he switched horses uh kind of mid-race to Opta or well, to Space Out Equity, uh which worked out really well for us. But, the reason why some other folks were, you know, looked at it and then kind of said, "Eh, not so sure about that." was the business really needed to be transformed uh post-deal. And what we did was we kept the metallurgical solutions division, and we basically over time sold off or transformed the other two uh businesses. Got completely rid of the garnet business, sold that off, and then the abrasives business we uh significantly curtailed, probably, you know, sold off or closed down about 90% of it, all the stuff that was cash flow negative or EBITDA negative or and consuming a lot of uh human capital, fixed capital, working capital. That worked out really well. We Yeah, I was based on the strategy I put together, uh we were able to double the EBITDA of that business in the first 18 months and uh pay down the debt, uh halve the debt uh as well by selling off things and uh generating better working capital and free cash flow efficiency in the business. So, kind of good story there what what we did, but any deterioration in that work. >> You know, when talking about all of them markets, this this is the kind of fun stuff that people love to kind of know what's going on behind the scenes. It's like sure. It was this spherical offloading for whatever reason these assets that are focused on these different you know products that you mentioned. As you go to decide, like how did you kind of identify the the diamond in the rough that the other PE firms couldn't really recognize? Like did you have enough data to know that you would be able to sell off one of those and like shut off the other or were you kind of gambling, like you know, that you would be able to execute on these things, like how how true was your underwriting to the reality of what actually came out? And what would you attribute that to? Yeah, so I Here's what I'll tell you. When we do every deal, we we do an underwrite and we put together very detailed project plans and ownership plans, especially for the first 2 years of what we're going to do and the actions we're going to take and how it's going to affect the business. I I I think on average we get that like I don't know, 70% to 85% accurate and correct. This was a weird one where it was like 98% accurate. Like literally the plan I put together by month, actually in the first 2 months it was like literally by week and then for the first 18 months it was like by month. It was like Okay, these are the plants we're going to These are businesses we're going to keep. These are the These are the plants and businesses we're not going to keep. It It went on that plan or better, you know, almost perfectly, which is odd. Like it it never goes perfect. Like, you know, usually see it go that well. But, what we'll do is we'll kind of put enough um you know, basically um you know, opportunity in the plan such that if things don't go perfect, it will still work out okay. And in this business, the reason why other people didn't want to do it, which which makes sense, um and it kind of makes sense why we were comfortable with it, was there were 26 manufacturing plants in that business uh when we bought it, and within 18 months we had that down to nine. And everybody saw that like things were going to need to be reorganized and transformed in the first 18 months. And most PE firms look at that and go, "Oh, wow. Like, you know, uh doing something with 17 manufacturing plants, that's a lot. And that that's that feels very cumbersome and burdensome." But, because of our backgrounds, uh you know, having worked in manufacturing, uh we've all been all the partners at Bayside have all been C-level guys at manufacturing businesses at middle-market manufacturing businesses. We looked at that and said, "Okay, we understand what happens at these manufacturing plants. We understand how shutting them down will work. We understand how to execute that. We understand what resources will be needed. We're comfortable with that." Whereas, a lot of other people would look at it and go, "Uh, you know, uh assume liabilities uh you know, that I need to deal with, assume, you know, human capital issues I need to deal with, uh assume fixed capital issues I need to deal with. Ooh, big, messy, you know, scary." And we looked at it and go, "Eh, it's not it's this these plants aren't really that hard to deal with compared to other things we had dealt with in the past." So, we got very comfortable with it, and it was very clear how that linked to a financial result. So, those you know, businesses we sold off and plants we shut down, it was very, very clear that they were consuming 70% of the capital of the business and providing uh very little if any EBITDA and then a lot of a lot of cases negative EBITDA or negative free cash flow. So, based on that, it was easy to say, "Hey, let's you know, it's like a little bit like being a surgeon. Like, let's cut out the bad part and you know, be done with it and therefore once we do that, like the patient will flourish." And that's exactly what happened. And often in a lot of experiences I have with companies is it takes this change management like it takes you know, children and our to be able to make those cuts just due to whatever legacy relationships, culture, whatever might be there that says like, "Okay, this was someone's project that they we got to give them enough time or whatever." And reality is like, "That's cancer." You just need to cut it out and uh you know, focus on good old-fashioned cash flow. Yeah, it's it's like uh it's like people uh the owners are like, "No, but it's my favorite tumor." It's like but it's a it's a cancerous tumor. We got you got to get rid of it. It's like, "But I've known that tumor for 20 years." And it's like, "Uh it's still a tumor." Again, that's where I think private equity plays such an important role in the economy and just being able to kind of bring in that fresh ownership perspective. I see deals all the time where especially with founder-like companies where I'm like, "You got to kill your baby." Like, you can give your all to things, but you got to kill all of them. And that's just a really hard pill for them to swallow and you kind of have to you know, go to due diligence and post-deal, post-founder, you kind of have to go in there and make those cuts. Otherwise, you know, it's just that founder will never do it themselves. Curious, when you come into transactions, so we talked about Opta and kind of deal structure like I guess what some of the pitfalls that you've run into that you kind of now reflect on like, "Okay, you know, that's 98% of the plan. Like, what would we do What would you do differently?" Real quick, if you're a founder doing over 5 million in revenue and want to know what the best $100 million plus founders are doing to fuel their growth, then make sure to subscribe to our $100 million Exits newsletter, get the playbooks that are proven on how to fund, grow, and sell your business. I'll even give you a curated list of investors that want to invest in your business. It's totally free. All you have to do is click that link down below, subscribe, do it now. I promise it's worth it. You won't regret it. You got nothing to lose. Go ahead, subscribe now. Back to the show. I think the biggest challenge, um you know, with private equity, um you know, private equity generally and then also, you know, maybe I'll talk a little bit more about our strategy, um but private equity generally, I I think that it's very easy to overvalue businesses uh by uh using hope as a strategy, right? And what I mean by that is like you'll see folks, um you know, they'll they'll look at a deal and they'll value it and put a, you know, multiple on it and ultimately an enterprise value uh because they hope that the economy is going to get better um and the top line is going to grow organically with macroeconomic tailwinds. They'll put a higher valuation because they hope that they're going to do acquisitions that will have synergies and create value in the business, right? They'll put in a higher valuation on things because they hope they'll exit it at a higher multiple um than what they bought it at, kind of a greater fool strategy. So, that that's a challenge uh in private equity and or they'll put a higher valuation on it because they hope that they can get a five to seven x leverage ratio and write a really, really small equity check with a massive amount of debt and that that debt will not create insolvency based on, you know, everything going really well in their hold period. So, we we don't do those things at SapeSide. We kind of assume all those things are going to, you know, either be negative or not happen. Like we we never assume multiple expansion on exit. We don't assume macroeconomic tailwinds. Usually we actually assume like negative macroeconomic growth. We don't put even though we'll see things and we'll be like, we can definitely do some acquisitions here. We don't we don't build those into the into the model and we don't use a lot of leverage. We we tend to use two to three x leverage ratios or less to start with just because we know that what we like to do with our strategy, again, fix and build. If we need to do a transfer transformation to start with, that is very hampered by a lot of debt service. So, we tend to use very low debt to begin with until we've improved the business to get it to a nice stable growable platform. And then we'll come back and recap the debt. But we still probably won't ever go above like three and a half or four x leverage ratios just cuz we tend to be more conservative and it's manufacturing and in 50 million to 500 million dollar revenue businesses, it doesn't make sense to have a 5 to 7 x leverage ratio in our opinions anyway. There's plenty of growth opportunities and value creation without high leverage ratios. So, that that's a big, you know, thing that you see in private equity and it's just stuff that we don't do. So, I like to call it um you know, back back when I was a kid, yeah, I I wrestled and I go to a lot of like wrestling tournaments. And wrestling is like, you know, 24 minutes of terror combined with like 6 hours of waiting around to wrestle those four matches. So, you play a lot of euchre or, you know, some card game with your wrestling teammates in between and we'd always like try to stack the deck against each other and that's a lot of like private equity investing at Space Side and our strategy is like how do you try to play uh you know, the game with a stacked deck so that, you know, you get the outcome that that you want. And that stacked deck is not over leveraging it and it's getting the right entry multiples and understanding what the right transformational activities will be in the first couple of years to set the business up for success. Yeah, those you know, don't have hope as a strategy. Um but when it comes to uh what you're saying the market like what are you seeing right now, 2026, in terms of access to leverage? Uh both from the deals that you're doing and maybe you know, other people that you're seeing. Yeah, so for us, um you know, so there's a lot going on in the debt markets right now, especially private credit. Um there's some challenges there. It hasn't affected us uh you know, negatively um relative to being able to access capital because again, our our debt structure is tending to be pretty conservative uh at a two to three x leverage ratio. And there there's a couple different private uh capital guys we work with that um you know, we've been able to, you know, do well with and have good build good relationships with, but for other people um that really like higher leverage ratio deals, uh I'd say it's a little bit more difficult right now. Um you know, debt costs have gone up over the last like four to five years, uh which means that uh multiples have gone down, uh which in my opinion, that's actually kind of a good thing, right? Cuz it's like a more efficient allocation of capital because we're more realistic about what capital costs are. Like, you know, 4 or 5 years ago when debt costs were dang near zero, like, it was really easy for people to pay really high multiples uh because like the debt was almost free. Um and if you did it on a nominal basis, you you could you could almost argue it was free because inflation was higher than uh you know, some of the rates you were getting on some of the debt instruments. Um but, you know, whatever, that's a whole other uh macroeconomic treatise that we don't need to go down, but the uh the upshot is for us, it's fine. For a lot of other private equity firms, uh it's difficult. And it's a bit of a double whammy for other PE firms, and here's why. So, co- you're still seeing a hangover hangover effect of COVID right now. And what I mean by that is people are holding They've been holding businesses for longer than they wanted to because COVID put a, you know, 3 to 5-year um you know, stay on exits uh for people. So, they're 3 to 5 years behind on exits. So, they're not They haven't generated the returns that they were looking to generate when they were looking uh for generating returns. So, it's kind of like um you know, they're they're off schedule. They're off cycle in terms of, you know, how how things go for private equity. It's like you raise, you deploy, you exit, you know, you do it all over again. It's It's like overlapping sine waves. Uh it kind of looks like uh you know, electricity, three-phase electricity of three sine waves. But, now those sine waves are elongated or broken up because of COVID. And then the other issue is like, right now, people are kind of because of a lot of things that are going on uh geopolitically or macroeconomically, there's a lot of people going, "Uh I'm I'm going to just hold this business right now. Um you know, and and wait and see what happens. And or the things that are coming to market uh, you know, typical private equity is looking at it going, "Oh, man, debt costs are really expensive uh, right now. So, you know, the multiples we would normally pay when debt costs are cheap, those have become a lot lower and then not as attractive to sellers and therefore like their deal flow is a little bit uh, curtailed. So, the good news is for us uh, because of what we like to do, uh, where we're fine with, you know, hairier deals that need to be structured and we're fine with deals that need to be transferred after we own them and given that we don't use a lot of debt, uh, we're seeing really pretty good deal flow of things that we're excited about buying and structuring right and, you know, giving sellers a solution if they're looking to get out of at this point. And so, when it comes to the manufacturing space that you're in, what are you typically seeing multiples at? Like what how are these companies being valued at? Where are you going to see the price ranges from? Yeah, low to low to mid single digits um, tends to be, you know, what what we're seeing and it depends on, you know, what what phase that business is in. Um, so, if it's if we need to do fix and build, it's toward the lower end of that range. If it's a situation where it's it's a business where we're just going to, you know, improve it by growing it, you know, more just phase two, the build part, then more towards the higher end of the those ranges. And obviously it depends on the segment they're in and, you know, what they do and, you know, their their competitive dynamics in the segment and whatnot, but yeah, the short answer is uh, you know, low to mid single digit multiple entry multiples for manufacturing businesses. And you calculate that on EBITDA? On EBITDA, yes. Yeah. Yeah. And in the multi-asking world, I'm curious like how much of a difference do you see between EBITDA and cash flow? You know, is there more cash flow you EBITDA or is there less cash flow than EBITDA and kind of how do you guys value cash flow in these equations? Yeah, great question. Um >> >> and one that's very, very important to consider. And I you know, the thing is that's interesting is EBITDA is a heuristic or, you know, rule of thumb um kind of for unlevered free cash flow. It It It doesn't exactly work one to one, obviously. Uh but that's kind of the theory. So, like a lot of people use that as a multiple. Um use that as a way to do a multiple, right? And I would say most of the time that's that's pretty It's pretty accurate. It's very directionally correct and that that works. That said, you do have to understand free cash flow and uh or, you know, unlevered free cash flow free cash flow and unlevered free cash flow and free cash flow conversion. The reason being is that part of what goes into, you know, calculating free cash flow, as I'm sure you know and everybody else knows, you got to think about CapEx, capital expenditures. So, you could have a business that has a ton of operating cash flow, right? Uh cash flow that's derived from uh net income and working capital, but it it might have not a lot of free cash flow, which is essentially, I'm going to overly simplify this, but operating cash flow minus CapEx basically gets you to free cash flow. Like, how much money do you have to spend on uh basically debt service? And then, you know, you take out uh debt service and then it's like, okay, how much cash flow is available to equity uh holders? Well, if you have a lot of CapEx in a business, then you don't have as much free cash flow that's available for debt service. And that's a really, really important distinction in manufacturing because in manufacturing, different manufacturing businesses or segments have more or less CapEx. And you know, it's we tend to like businesses with and this is everybody this is true of everybody, but like we really look for it, we screen for it, which is we like businesses with higher free cash flow conversion. We're completely happy to invest in CapEx, you know, fixed capital, property, plant, equipment. Especially when it has the ability to dramatically improve the profile of a business in terms of either improving the EBITDA or EBITDA or EBITDA margins or improving the cash flow of the business in some way or form. But it's something to think about in manufacturing businesses, whereas like service businesses tend to have a lot less CapEx and therefore they have they generally speaking as a segment service has a better free cash flow conversion than most man than the average in manufacturing. So it's something that we think a lot about and it it's really really important to think about it. But you know, if you as long as you're paying an appropriate multiple relative to an EBITDA multiple relative to free cash flow conversion it's okay. But like we looked at a business about 18 months ago. It's kind of interesting. It had like 30, if I remember correctly, it had like $33 million of EBITDA per year and it had $30 million of CapEx. So you know, when you when you take the you know, the EBITDA and then you think about how that business would grow and how that would affect working capital and then you subtract out the CapEx, the answer was that free cash flow was actually negative, not positive. Yeah. And that's why I wanted to ask that question because I think it's something that's just so often overlooked. Like I feel like all the devil all the details of a business with its actual but it's healthy or not healthy is found in the cash flow statements. In terms of like action cash out versus you know, P&L or or balance sheet where I feel like cash actually can see how much cash comes into a business and how much actually goes out of business actually tells you a lot more of what's actually happening. Um and and so I think that's why it's so important for for people to understand you know, one what multiple you're actually paying on versus um what's going on with the business. Just just another like interesting story anecdote about that. We another business we looked at last year had allegedly $5 million of of adjusted LTM EBITDA like last 12 month EBITDA. Um but when you looked at the free cash flow, it was only a million dollars. And the reason why is the banker had done a ton of adjustments and there was a there was a change of accounting principle. Um and so when you looked at it on a you know, basically they they had they had adjusted their way to 5 million of EBITDA, but the free cash flow was 1 million. And it was all in the adjustments that were they were pro they weren't pro forma, they were pro fake-a. Right? And and and so it's so you look at it you go like, okay guys, come on like I can't spend EBITDA, I can only spend cash. And the I think it's a really important thing to understand like you know, we we use shorthand you know, multiples of EBITDA on private equity like to you know, get a good directionally correct understanding of a value. But then when we're doing the LBO model, the three statement LBO model, we're spending a lot of time understanding you know, unlevered free cash flow and the to your exact question, how closely does it really mirror EBITDA? Because you can fake EBITDA. There there there's a lot of ways to fake EBITDA. There are not a lot of ways to fake cash flow. Like there's basically none. You just commit fraud flat out, don't you? There are no honest ways to fake it. Let's put it that way. >> there are no there are no super date and do it right. Doing all the deals that you've now worked on, and you guys have done it in this unique structure where it's kind of like more family office. You've done a lot of it with your own capital from the success of your previous acquisitions. But you have since raised this continuation fund. You raised a couple funds. What ultimately led to you to going out seeking outside capital as opposed to continuously, you know, funding everything internally? Yeah, simple answer, speed. Um speed of getting a deal put together and calling capital. And here's why I say that. So, uh before we raised the fund, there were kind of like three parts of a deal that we would work on. So, one was uh basically the structuring, like how you know how we're going to structure it. Um in terms of like dealing with, you know, the seller's needs. Number two was like, okay, how are we going to transform it after we close? And then number three, uh you know, in some of the bigger deals we looked at was what's the cap structure going to look like? And you know, figuring out the debt is um not that bad to do. I mean, you got to do it. You got to model it out and understand it and whatnot. But the hard part was when we needed we didn't have enough money in our pocket. >> pockets. Um to figure out the equity cap structure uh quickly. And we had to go out and raise outside capital more like an independent sponsor would do. And there were certain deals that we were looking at uh that we loved. We're like, ah, this is a great this is a great deal. Uh it fits us perfectly. There's a structuring opportunity here and there's a transformation opportunity here. We've got the debt all set up. We know how to do that. We just need like a bigger equity check because either, you know, it's too much of our own net worth or you know, it it's helpful in the structuring to have a partner. And we lost out on, I don't know, probably like 10 or 15 like really good deals uh between like you know, 2012 and 2016 because of speed. So, we kind of said, "Okay, how do how do we solve this?" Like and you know, what are other people doing to solve this? Um you know, we we really like, you know, putting our money where our mouth is. Um but like we need to get better at like being able to close these deals quicker or else like we lose them and we miss the opportunity. Well, the answer was, "Well, let's raise a fund and do have institutional capital that will allow us to call capital and be able to get these deals done." And so, that's what we said, "Hey, let's go out. Let's raise a fund um and you know, get that get that done so that we can call capital and then we take that third part off the board of being a challenge of like how do you set up the cap structure um quickly to take advantage of the structuring and the transformational opportunities uh that we were seeing. So, yeah, that that was the answer was uh you know, speed to close sometimes matter uh matters to be able to get a really good deal done and so, uh having a fund that we could call capital from allowed us to uh deal with that constraint and it's it's worked out really well. Yeah, that's good context and good for you to know. So, Eric, what I want you to do now is I'm going to ask you some you know, quick share and I would love for you to kind of give me your best answer in less than a minute uh for these next few questions here. So, first one I'll hit is what is the first thing you look for in what we've kind of called here a messy manufacturing business that tells you it can be a great opportunity? Yeah, so for us it's pretty simple. It's um some opportunity to enter at a reasonable valuation because they're structuring and transformational activity. So, we're very willing to work with uh sellers that have businesses that you know, are under-loved and under-managed and therefore underperforming to buy them in a structure that is useful to the seller and uh you know, innovative or whatnot to get the deal done and then after transform the business in a way that improves it uh such that it it's worth more. So, you know, said simply um sometimes one man's trash is another man's treasure and uh we're uh sometimes economic garbage men in that way where we'll buy something that's uh maybe under-loved and under-managed and uh you know, therefore uh maybe not uh one man's treasure and we'll we'll take it and you know, improve it and make it into you know, something uh nice and better performing. So, now tell me that a deal that you walked away from specifically due to a red flag that you encountered in that deal process. Yeah, sure. Uh we had a deal last year um you know, where we were working on the deal and we walked away cuz the red flag was uh the management team uh in the deal and we got as we started to do some due diligence, we you know, looked at it and we said, you know, the people in this deal in this company were we're not so sure about and there's two things where we, you know, kind of uh we kind of say like, uh you know, maybe not, right? And one is integrity, right? So, if we look at something go, uh we question the integrity of these folks, like that's a huge red flag. And then at our firm uh you know, we have a kind of a no uh excuse the foul language, a no rule. Um we we don't we don't like to work with people um, that uh, you know, they love them some them uh, too much and it just doesn't doesn't fit for us. So, uh, if if integrity or, you know, big egos uh, where the ability doesn't back up uh, the the ego or we're not good with that. So, that deal was one of those cases where both existed and we just said, "You know what? This isn't the right fit for us and, you know, it's uh, management teams are really really critical in deals. So, we're going to we're going to just walk away." For a founder deciding whether to take a deal from private equity or a strategic buyer, what's the difference they can only realize after the deal is closed? Yeah, so uh, good question. Uh, probably really good question for me because I've worked in both corporate M&A um, and private equity. So, how strategic think about a uh, acquisition is a lot of differ- is a lot different than how private equity thinks about an acquisition. The biggest difference is the assumption of hold period. So, in corporate M&A, the assumption is perpetuity. And so, it's um, you know, that's an important difference and in private equity, it's usually 5 to 7 years. What's interesting about that is um, you know, in corporate M&A, a lot of times you're looking for synergies and that means um, you know, a lot of times those synergies are found in redundant management. In private equity, we don't we don't want to find we're not looking for redundancies in management. We want the management team to stay with the business because that's ultimately who's going to run it. We we make our money by doing deals, not by, you know, buying them and running them uh, for for the management team. So, those are the two big differences to understand uh, between the two. So, if a, you know, strategic buyer buys a company, they're going to they want to fold that into the larger enterprise. They want to assimilate it and then turn the crank on the cash flow. Whereas in private equity, they want to want the business to run independently, improve it in the 5 to 7 year hold period, but it's not an assimilation where, you know, a lot of things are going to change. In private equity, we want as many things to stay the same as possible cuz there's enough other things going on in the deal that it doesn't make sense to want to try to change as many things as possible to generate synergies. We generate our improvements by, you know, doing incremental improvements, you know, evolutionary improvements, not revolutionary improvements. And final question, what's your advice for a founder trying to sell a complicated business to maximize upside? Yeah, a couple things there. First of all, start early. Um and under you know, get and number two, I guess would be hire good advisers starting early. Um there's a lot of folks out there that uh will consult with you on how to exit, whether it's an investment bank or consulting firm, on on how exit work exits work. And usually you kind of want to start 18 to 24 months, you know, before you want a deal to close, start thinking about uh you know, what that looks like. And then the third thing would be uh you know, kind of if you haven't done it already uh during that, you know, thinking about that in the 18 to 24 months prior to exit, you got to set up the business uh so it's a scalable platform. And what does that mostly mean for the uh seller? It means that the business can run without them uh they're all day, every day micromanaging things. So, the buyer needs to see that the business comes with a uh strong management team that can continue on uh after the seller sells the business. Assuming the seller may or may not want to walk away, but the assumption is going to probably be from the buyer that once the seller has a lot of money in their pocket, they're probably not going to want to continue. Um and they may not and they may even say they do, but a lot of times sellers say that and the reality is like 3 to 6 months after they're kind of like, "Eh, you know, I'm I kind of want to go pursue other things because I had a nice a nice exit here." So, those are those are the three big things. Plan early, hire the right folks to help you, and then make sure the business is set up as a uh scalable platform. Great advice, Eric. Eric, it's been amazing having you on the show, getting your insights. If anyone wants to reach out or learn more about you, what would be the best way for them to do so? Yeah, two good ways to do that, Jason. Uh if you go on our website, spaceatequity.com, you can find my contact information there. Uh and or if you go on my LinkedIn, uh it's just my name. Uh my contact information, cell and email are also there. And yeah, I'm always happy to talk to people. If somebody's you know, wants more uh thought on selling a 50 to 500 million-dollar uh revenue manufacturing business, uh how structuring or transformation works in that, happy to talk to them. And then, you know, we're always looking for good folks to work with uh in our portfolio companies as well. So, uh if there's folks out there that are uh you know, want to look uh work in a 50 to 500 million-dollar revenue manufacturing business, we're always looking for operating partner talent and C-level talent. Awesome. Well, Eric, thank you so much for for coming on. I'll make sure to include those in the show notes down below. And if anyone would like an intro to Eric, don't uh hesitate to reach out to me directly. Jason at thena.vc and I'll be happy to tee up that intro for you. Uh Eric, thank you for coming on. Thanks for having me. Cheers. All expressions of opinion provided in this podcast are subject to change without notice and are not intended to be a forecast of future events or results. There is no assurance that the trends highlighted in this podcast will occur in the future or that the projections, if any, will be met. If you were inspired by today's episode, then go ahead watch this next episode. I promise it's worth it. 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