Welcome to our new website!
Nov. 8, 2021

E:33 Top M&A Entrepreneurs - Nick McLean Four Pillars and Five Acquisitions

Nick McLean is founder and member Four Pillar Investments.  Nick participates in all aspects of Four Pillars’ business. Currently, most of his activities revolve around deal origination and deal execution.

00:00 Intro to Nick McLean - bio
00:38 Why he called his company Four Pillars Investors - and what they mean to how he operates
03:27  How they qualify people from companies they acquire - 
05:37 The industry sector they acquires - and why he exited the furniture company
07:43  His Manufacturing,  Industrial Engineering Roots - The Tangible Importance to economy
09:31 Four Pillars First Acquisition - how they found the deal - terms and price of the deal - sticking points - buying a car with no gas
15:00  Applying operating efficiencies to the business and the results - steel prices rising 4X
16:48  Having the plant manager ascended into the #1 role
18:21  2nd Acquisition Eagle Precision larger deal and easier to get done - sourced / price 
22:00  Rev / Ebidta results on Eagle Precision
23:24  The bolt on company that they missed on - how they lost on the deal - why they tried to buy it
24:59  Acquiring Turk Mfg. - why the company sold to Four Pillars - what it added to portfolio
27:35  The Investors and financing for Eagle Precision and Turk Mfg.
30:45  The Dart Casting Acquisition - how that was sourced,  who financed it - capital provider partnerships, people considerations - the process for finding capital
37:24  How he works with brokers
39:00  How experience has helped him in new negotiations - valuations in the same ball park
40:31  His deal flow activities - all of the above - how luck and timing factor in
42:26  Typical drivers that motivate seller to sell - how they position the transition
44:32  Creating a bigger second bite of the apple for sellers - shooting for 8X
50:34   What was your call to adventure - that moment - the better mouse trap
53:15   Meeting the mentor - from intrinsic and personal experience
55:12   What was biggest stumbling block to his success - overcoming lack of experience


Jon Stoddard: Welcome to the Top M&A Entrepreneurs. Today, my guest is Nick McLean from Four Pillars Investors. Just a little bio on Nick here, he is the founder of Pillars Investors, he previously had GXP Investments; he was Corporate Developer at a mineral[?] company; Corporate Developer and Treasury at Fike; Supply Chain Consultant at Intel; Corporate Developer at 3M; Analyst at Deloitte; and he's got an MBA from Michigan; and a BS from Industrial Engineering. So, thank you for being here, Nick.


Nick McLean: Thank you for having me.


Jon: So, tell me about Four Pillars Investors. Why you called it that? I take it that there are four pillars of a leg or a coliseum or something. Tell us about that. What are those four pillars? And what do they mean to your business?


Nick: Sure. So, whenever we're founding the business, there's a lot of different companies with capital partners and whatnot. It's hard to tell exactly what they do. And so, when I talked to a few friends, associates, colleagues, etc., about a potential name for the business and it was like, "Okay, what about Midwest Manufacturing Acquisition Company?" And it was often met with silence and whatnot. So, I realized that I probably need to go back to the drawing board and figure out what a better name should be. And the processes that I use are - I feel like I'm very principle-centered. And so, I just jotted down a number of different concepts or principles that were important to me. And I came up with a list of, let's call it 12 to 15 distill those down into 4, that are not only important to me, important to the team, but they show up almost on a daily basis and how we think about our company, how we think about the companies that we potentially invest in, and how we help and/or work with the companies that we are owners of.


Jon: Yeah. So, the Four Pillars are, I see in your website, relationships, challenge the status quo, servant leadership, and persistence. Can you just tell me about each one of those? Why was that the most important in a pillar to you?


Nick: Sure. So, I would say, perhaps the most dominant of the four pillars is relationships as a cornerstone for success. Any time we are meeting with folks, we honestly and legitimately try to form a strong relationship with the person. We're not about transaction. We don't take a transactional focus. We don't think about what's best for us and not care about the other person. We want to form a bond with whoever we work with because we feel like if there is some bond or relationship there, everybody is going to be better off. I'm not saying that that's going to work for everybody or that's the one principle that will lead to business success because I'm sure it's not. However, it is important to us, and we don't want to be successful if we're not building solid relationships with the folks that we work with.


Jon: How do you determine that to work with somebody? I mean, do you put somebody through tests, or is it naturally come up during your communications? Like, "Oh, that was kind of prickly. I would not want to be doing business with that guy." Or his style or maybe his demeaning behavior? Or maybe he was rude to a waitress or something?


Nick: Yeah, all those things. I mean, we haven't relied on profiles as much. If you have somebody applying to be an employee for your company, it's easy to send them through a psychological profile or a job assessment type profile. But whenever we're talking about business owners who are potentially going to sell their business to Four Pillars, it's a little bit more of a challenge to get them to agree to do a personality profile. So, sometimes, we'll do that as a very late stage in our diligence process. But early on, it wouldn't take place. And so, how do we determine that? It's a lot of what you said. If we're at lunch and how they treat the waitstaff. "Are they opening doors for people and whatnot?" At the end of the day, though, we talk a lot. We, typically, try to listen more than we talk. However, when it comes to helping us determine whether we'll work well with someone, sometimes we do a little bit of talking, and that talking, usually, is around the Four Pillars. We tell them what those four pillars are, and if after we say those four pillars, they are just kind of like, "Oh, yeah. That sounds pretty good." We realized that those pillars probably didn't resonate with that person too well. However, what is more common whenever we do strike a chord with someone is one of the four pillars will really stand out. And they'll say, "Yeah, I really like that approach. That was really important and vital to what we do here at Company XYZ, etc."


Jon: Yeah, interesting. Well, that's a good foundation to start with. So let's talk about your investments right now. I saw that you're investing in Southwest Steel Fabricators, Dart Casting, Eagle Precision Sheet Metal, and Turk Manufacturing. So you have 4 in your portfolio right now?


Nick: That's correct. Actually, I would call it 3. Turk is more of a bolt onto Eagle. It's Southwest Steel, Dart, and Eagle, which has two locations.


Jon: Yeah. Now, you bought Nell Hill's of furniture, but you exited that because, I don't know what that means, except that it's a furniture company versus a steel kind of manufacturing. It didn't fit.


Nick: It was more of an opportunistic transaction. So, Nell Hill's is an iconic retail store here in the city. Growing up, my mom went there, as well as the other folks that we did the deal with. We had a very strong appreciation for the brand, for the company. And what happened is there's a husband and wife team that wanted to buy the business for the wife to run. However, they wanted some expertise, a little bit more M&A expertise on the team to try and get the deal closed and manage a post-close. And so, the husband, who I knew before, just asked if Four Pillars wanted to partner on him with it. I said, absolutely. I expected that to be a long-term hold and just a steady income stream over the years. However, the business is doing pretty well, and husband and wife decided that they were in a position to buy us out. And so, we took them up on that and are no longer participating in it. But it was a very good transaction. Husband and wife are doing a great, great job. We're still friends. We still get along very well. So, it was just a good transaction all the way around. Even despite of all the stress and challenges we faced during the COVID pandemic.


Jon: Yeah, that's cool. Warren Buffett bought that furniture company. He still owns it.


Nick: Yeah, Nebraska Furniture Mart.


Jon: Yeah. There you go. So why this type of sector, Steel Fabrication, Dart Casting, Precision Sheet Metal? Why is that? Is your family from that type of? Or do you?


Nick: Very good question. So, my undergraduate degree is Industrial Engineering, and a lot of what industrial engineering is about making processes more efficient. Typically, or historically, that's been almost exclusively in a manufacturing environment. As of late, it started to take place in more sector- manufacturing type principles in more sectors. But again, historically, industrial engineers have worked for manufacturers. After my undergrad, I went to work for Deloitte Consulting and was working with manufacturers there. I like the manufacturing space. When I was at Deloitte, all the folks I work with, we'd always joke about how you will be working on a project for 6 months, and there's nothing tangible that you create, whereas that's totally different with manufacturing. Additionally, I think manufacturing is very important for an economy, especially starting in the 80s and 90s. The US was steering in a straight line towards being more of a service economy, and we're still there. However, with the pandemic, with other global macroeconomic changes that are taking place, we really feel like manufacturing is what a great place to be at in the US as more companies seek to augment their supply chains with a domestic source of manufacturing which is a positive trend for the country, positive trend for manufacturers, in particular.


Jon: Yeah. Which one was the first one that you purchased?


Nick: Southwest Steel.


Jon: Southwest Steel. And how was that process? I mean, how did you start? Is it like, "Hey, we're going to buy companies between 3million and 15million ibadah[?] Got to do this"? And what did that whole outreach start like?


Nick: Sure. This is a very good question. This is a question that's pretty much asked of anybody that works in private equity. And, what I would say is you try a little bit of everything and you never know what is going to work for that particular deal. So, we would talk to business brokers and investment bankers. We sent out letters, make phone calls to business owners. We did general networking, etc. This deal was represented by an investment bank here in Kansas City which is where Four Pillars is based. Our earlier deals were a little bit smaller. This one was very small, as well. But it was local. We like the opportunity. We like the story. So that's why we decided to pursue it.


Jon: Yeah. Sounds like you use one of your four pillars which is persistence.


Nick: No question. You don't understand how many times I've heard "No" in my life.


Jon: Yeah. So this investment banker, was it in their portfolio? Or they just knew about it and they said, "I'll make the introduction."?


Nick: This investment bank almost exclusively focuses on sell-side engagements. So, their clients will hire them to help them sell their business.


Jon: Got it. So, would you say it was the right multiple as what the investment banker did? How was that negotiation? Fair price?


Nick: Valuation is always very difficult. And one thing that I think that a lot of people, perhaps, some people that don't live in the M&A world every day is that, there's definitely a difference between the valuation and the structure. Those are two different discussions. Typically, if a seller wants a specific number, then, we will try to give them that number. However, we'll have to create a structure that is still agreeable to us. And, as it relates to Southwest Steel because that was our first deal and because it was smaller, we actually got a SBA loan to help with the majority of the funding for that deal.


Jon: What was that 70 or 90% of the purchase price or?


Nick: Something around 70%.


Jon: 70%? Okay. How long did that process take? I've been through the SBA process and it just took a long time to get approved. And then, to go through my deal, ultimately fell out but the whole SBA process took a lot longer than speed was the opposite.


Nick: Yeah. Absolutely. I mean, even now, I can only imagine what the process would be like just because anything having to do with the government is extremely log-jammed and slow. It did take a long time. If we could have sped that up, the close could have happened more quickly. However, in any deal, there are a lot of different workstreams, if you will, that lead to either being a quick deal or a slow deal. I'm trying to think back on this particular deal. One of the larger sticking points was determining how much working capital should remain in the business.


Jon: So, what was average for the company and what did the SBA want or need?


Nick: It was less what the SBA wanted because they're not too concerned about that. It was more of what the sellers were comfortable with. At the smaller end, like on more mainstream type transactions, let's call it half million to 1.5 million. Typically, the starting position is that the sellers want to keep all their AR and they want to sell you their inventory at cost or at face value or market value. However, on more traditional middle-market deals, working capital is just part of the purchase price. And so, the challenge was trying to figure out what was the appropriate method on this deal and you based on the history, based on the track record, based on the investment that would be required. We were only going to be interested in the deal if working capital was included in that purchase price. And so, ultimately we got there. You know how it goes. It was a negotiation point that we had to come to terms on. And, thankfully, we were able to do that.


Jon: I wouldn't go anywhere with a manufacturing company's current assets minus current liabilities. That's what your working capital is.


Nick: Absolutely.


Jon: I want you to complete that or not conclude that because you're going to need a lot of equipment.


Nick: Yeah. Absolutely. That's our point, exactly. It's like buying a car with no gas. It's not going to take you anywhere.


Jon: Why would you do that? So, how is it going for Southwest Steel? The website says you increase efficiencies, are operating capabilities. Has that happened? Come to realization?


Nick: Absolutely. We tried to grow. What we've tried to do is we try to grow the staff of production personnel while making sure that the front office staff wasn't overloaded or anything. And, I feel like we're in a good position there. Just like, probably, every other company in the United States. It's a challenge to find a laborer. But we've betting the bull and just across the board have raised wages and that's helped us find additional welders and fitters and other types of production personnel. In terms of how the company is doing, we would certainly be in a better position if steel prices were not going through the roof. Right now, some of the steel is priced at 4 times of what it was a year or so ago. And as you can imagine, for projects that have a lot of steel on them, if your major raw material goes up 4 times, it's going to put the project in jeopardy. And so, some of the projects, in particular, that have been sponsored by the US Army Corps of Engineers have been delayed because of these overruns on cost. But, regardless, there're still projects getting released. We're definitely holding around. No question.


Jon: Well, that's good. So, you said you purchased that or got an SBA loan, 70%. I don't know what the SBA loans are what. Total max of $7 Million. So, if you just got an SBA loan for 70%, what was the other 30%? How much did you put down? How much did the seller finance? You can't have seller financing with the SBA. Is that correct?


Nick: You can.


Jon: Oh, you can? Okay.


Nick: Perhaps what you were thinking of is, they can't retain any ownership.


Jon: Yeah, that's right. Are they still involved in the operation as a consultant? No?


Nick: Not anymore. They stuck around for a year or so. And then transitioned out. We were very fortunate in that, the plant manager, he was top notch. He's actually a president of the company now. He's running the business and he's a part owner as well.


Jon: Was that a top consideration when you purchase a business? If this guy leaves, can the number 2 man step up?


Nick: Yes and no. He was definitely always considered a key employee. However, going into the deal, part of the thesis, if you will, was that I would be the one running the business. So, I did step in as a president of the company for about a year and a half. After that time, I went back to more working directly for Four Pillars to try and find the next deal, so to speak. And it was at that point where our plant manager ascended to the the role of president.


Jon: So, where did that other 30% of financing come from?


Nick: It was a mix of seller financing and personal funds from myself and my partner.


Jon: Okay, got it. So, what was the next one? Dart Casting or Eagle Precision?


Nick: Eagle Precision was the second one. That deal was sourced by my partner whose name is Thomas Sanford. He was living here in Kansas City but moved out to Portland with his wife to run that business. That deal closed in September 17.


Jon: Okay. You said Southwest Steel was a smaller deal. Was this a lot larger? Eagle Precision?


Nick: Probably about twice the size of the Southwest Steel.


Jon: Did you set that in your target? Say, "Hey look, all the effort energy we put into this first acquisition, probably spend the same amount of energy, but get paid better in a larger acquisition."?


Nick: You hit the nail on the head. Some folks are not as perceptive as you are. They think smaller deals are easier to get done. But that, in fact, is not true. Often times, larger deals are easier to get done just because the larger deals - the companies are more sophisticated. They have owners that have may been through an M&A process before. Their cadre of advisors is more experienced in M&A transactions. It's no more work to get a larger deal done. A lot of times it's even less work.


Jon: And he sourced that deal from where?


Nick: It was from a business broker out in the Pacific Northwest.


Jon: Would that be John Martinka? Because he does a lot of those deals in Pacific Northwest.


Nick: I'd have to go back. My partner might recall the name, but I don't.


Jon: And the price that you settled on, was it pretty close to the valuation of the banker or the investment brokers?


Nick: I'm trying to think that deal that the business broker did have a listing price for that business and that's pretty much where we settled at.


Jon: Was it a fair valuation, you would say? It's easy to say, like before you purchase, I think that's a fair valuation aside from the cobs[?], but then you get into it and then you're like, "Oh crap, I would not have paid this much for it," or "We got a great deal."?


Nick: It's not a direct answer to your question, but, there have been a lot of ups and downs at that company. The primary down being. We were pursuing an acquisition that fell through and that would've been the third acquisition out there, not the second. So this third acquisition fell through about a year or so ago, probably. And it was very disappointing. We all thought it was going to get done. It would have really transformed the company. Like I said, that was down. Fast forward to about right now, and I would just say that the future is very bright for these 2 companies. Thomas hired a very outstanding CEO, CFO who's very knowledgeable of the industry. We are adding a lot of great people and very important roles. Our customers are seeing what we're doing in terms of buying new equipment, adding square footage, and they're hitching their start to our, so to speak. Even though just a year ago, we were all down because the acquisition went through. Fast forward to right now, we're all super excited about what the future is going to bring for the company[?].


Jon: And have you guys increased revenue and even up? Bottom line too?


Nick: Revenue, yes. Even that not right now because we're growing. Right now, we're adding to the workforce in excess of the revenues that were bringing in. Over the past 2 or 3 months, we probably added 10 to 20 people and those were very well compensated folks. And that just hasn't really started to hit the top line numbers just yet.


Jon: Yeah. Who are the biggest customers there from Eagle Precision? What type is it? Is it government?


Nick: I wasn't familiar with this term but part of the Pacific Northwest is known as the Silicon Forest for, largely because of all the semiconductor manufacturers out there.


Jon: Yeah. Intel's out there.


Nick: Intel's out there. There's other companies like Applied Material, Lamb, that all are in and around semiconductors. And most of our work at those companies is related to the semiconductor industry.


Jon: Oh, interesting. So what was that? You did try to purchase a company. It was a bolt-on. What was the gap that you are missing and say, "Hey, if we buy this company, it will do X for us." Why did you try to do that? What was missing there?


Nick: Part of it was just size and scale. So, it was a larger company. And in the private equity world, if you can get to 5 million or more in EBITA then that opens up a much wider universe of potential buyers. And so, since our background, this is a private equity firm, they're going to want to exit their investment at some point. And so, the goal was to really get, not just greater than 5 million, which would open up a wider group of private equity buyers. Our goal was to get to greater than 10 million of EBITA. So, 10 million of EBITA, not only do you have a very wide group of private equity buyers, at that level the multiples that are paid for those businesses, multiples of EBITA are much higher.


Jon: There[?] you go from single digits. That's the key[?] to double digits, by that time.


Nick: Absolutely. That's a core part of our strategy is that we really like companies in the $3 to $4 million or EBITA range. If you're diligent and you show discipline, you can buy companies in the 4x to 6x range with 3 to 4 million of EBITA. Then, the next goal was to get it that north of 5. And if you can even take it from 5 million of EBITA to 10 million of EBITA, then you're going to have a very successful outcome.


Jon: And so that acquisition that you had didn't go through or execute. But you did add Turk Manufacturing bolt-on to Eagle. What did Turk do that made sense for the business?


Nick: The Turk acquisition is really a feather in the cap. I would like to say it's a feather in the cap for the company. But I have to say, it's a feather in the cap for my partner. And the reason why is because the former owners of Turk reached out to the former owners of Eagle and asked how Thomas was to work with, how Four Pillars was to work with, etc. And, obviously, we weren't privy to those conversations and don't know exactly what was said. But the feedback from the former owners of the first acquisition was positive enough that the owners of Turk just said, "We're not going to enter a process. We want to sell to you guys assuming we can come to an agreement on all the deal points and when we're able to do that, close the deal successfully and it's been a great acquisition. Very pleased to have been able to get that one done.


Jon: Was that an adjacency business that - What did it add to it? Did it have customers, IP, or supply distribution, or indirect/direct competitor? What was that?


Nick: For me, it was more around a horizontal integration. Eagle was more of a sheet metal manufacturer and Turk is more of a CNC machine shop. So, are you familiar with what a CNC machine shop is?


Jon: Yeah. I used to work for Autodesk, so like [inaudible]


Nick: Yeah, absolutely. Like I said, it was more of a horizontal integration. We wanted to serve a different type of customer and have a more complete offering for customers that needed more than just sheet metal parts, which are typically just bent or punched or cut into the customer specifications.


Jon: When the owner of Turk called the owner of Eagle, the previous owner, and said, "How is it like to work with them?" Was it because they were afraid because if we do merge, these guys going to cut all my people and they're all gone and I love my people or?


Nick: Yeah, I mean it's that. This is a legacy. People associate this company with me. I don't  want the company have a bad reputation. I care about the employees. I care about the customers. It's sum of all that. Absolutely.


Jon: How did you guys finance? Well, let's go start[?] back to the Eagle Precision. Where did the capital come for that to acquire that?


Nick: The capital for that came from 3 SBICs. SBICs are small business investment companies. It's a program administered by the ESBA where a private equity firm raises an amount of private capital and that's matched up to 2 to 1 from government funds.


Jon: Yeah, because you're outside the SBA7 at that point.


Nick: Yes. And so the 3 SBICs that we work with, KVCI, out of Kansas City, Konza Valley Capital was the lead investor. They were almost. A co-lead investor was Capital For Business out of St. Louis. And then, the third which is a little bit smaller investor is Mid-States Capital, also out of Kansas City.


Jon: How much do they put in towards the acquisition?


Nick: I'm thinking it was somewhere in the $3 to $5 million range. I can't remember the exact numbers but somewhere in that range.


Jon: Where did the rest come from? Is cash flow from the business or...?


Nick: In[?] that.


Jon: Great. At that point, were you still putting skin in the game personally? Or is it just all bags?


Nick: We, Thomas and I, make a conscious decision to put our personal funds into every deal that we do. If we were not willing to do that, then we say to ourselves, "Why are we even doing this deal if we're not willing to put our own money into it?"


Jon: How did you finance the Turk Manufacture? Was that from cash flow from Eagle or...?


Nick: It was partially just Eagle itself invest into Turk. But it was the same 3 SBICs put additional capital to support the acquisition as well as our senior lender [unintelligible] as well.


Jon: So what did they say? Did you always keep that door open and say, "Hey look, we have polls on acquisition. Would you guys be interested in that?" And they just said, "Yeah. Absolutely. Cash flow makes sense. Let's do it."?


Nick: Well, let me step back. So whenever we first discuss this opportunity with our backers, we say that we're not going to aggressively pursue an M&A strategy out of the gate. However, our goal was to grow by acquisition when the time was right, when the deal was right, etc. So, we had already teed it up that we expected to execute a few M&A transactions. Whenever Turk came to the play, the concept that had already been teed up with our capital providers whenever they toured the facility, they were able to get comfortable with the company, much like we were. That's why we were able to execute because we'd already teed it up. They were supportive of that strategy. And so, when we find out about the opportunity, it was just like this makes sense, let's do it.


Jon: Well, that's how they stay in businesses, funding people.


Nick: Yeah. They have to deploy capital.


Jon: So the last one was Dart Casting. How did you guys come across that deal?


Nick: Well, that deal, it's one of those things where it was a cold phone call. One of the folks on our team, her name's Monica, was able to find this company and have an email and a phone number and got a hold of one of the two brothers that was a co-owner of the business and was able to strike up a conversation. And, definitely, some ups and downs on that deal, just like there are on every deal. But we were able to get that one closed. The capital source on that one is Peninsula Capital out of Detroit, much like KVCI, Capital For Business, and Midstate. All of our capital providers today have been absolutely great to work with. In this business, especially for a group like Four Pillars, having trust in your capital providers is so important. And, all of these groups really want to enter into a partnership with a group like Four Pillars. It's not a transaction. It's really a partnership.


Jon: So that was a cold outreach by Monica and using persistence to get in front of these guys and finding that they're motivated, qualifying them. How long did that process take before, "Hey. Hi. My name is Monica. Are you interested in selling your business?" Like, 2 months later, 3 months later, 6 months later?


Nick: I think this was around 10 months later.


Jon: 10 months later?


Nick: Yeah. That's very slow. But part of the reason for that is two separate occasions during the process that the sellers backed out. And each time they backed out, it took a little while to get the deal back on the rails, so to speak.


Jon: So they were in the market to sell, then they started thinking about and then they go through this process, like, "Well, how do we get rich?" Like, "Should we get an investment or a broker or something like that to get a valuation?" Did they do all that stuff? Or did they just go, "We'll take you what you're offering?"


Nick: Well, it was a negotiation. We had to go back and forth. But, at the end of the day, they're- Well, let me digress for just a moment. Sometimes, you talk to business owners and they'll say, "Yeah, we really care about our employees and we really want a good partner." And then, you tell them what your purchase price will be. And they'll say, "Well this group over here offered me $25 more than you did. So he's going to pay me $10 million.  And $10 million and $25 and you're just going to pay me 10 million. So I'm going to go with that guy, even though he's not going to take care of my customers." That's an exaggeration just to show that a lot of times... [inaudible]


Jon: Yeah, money does different things to people.


Nick: It does. Typically, you'll always hear business owners say that their employees are important. And sometimes they really mean it, and other times they just feel like they have to say it or else it doesn't look favorably on them. The sellers at Dart- they are 2 stand up guys. They really do care about their employees. They do not want a situation where they sold the family business and they came in and ruin the culture, and the capital providers were micromanaging them. They still work for the business. We've helped grow the business. We've added new equipment. We bought another facility that added about 40% additional square footage to the facility. So far, it's just been a great investment, a big part due to the fact that the 2 brothers that we backed on this deal has just been- everything we thought they were and more.


Jon: So, how did you find the capital source out of Detroit versus going back to SBICs?


Nick: So, Four Pillars is what's called an independent sponsor. And so an independent sponsor is a private equity firm that doesn't have a committed pool of capital. And there is a whole community of independent sponsors and within that community, Peninsula is a very well-known supporter of independent sponsors. Largely, because almost all other independent sponsors that have interacted with Peninsula have had a similar experience to the one that I've had, just overwhelmingly, unequivocally positive. And so, because of their approach and because they're viewed so well, their names got out there as a good partner to work with. And so, whenever we were trying to raise the capital, Peninsula was one of the first calls that we made.


Jon: And you send the deck to them or the financials, quality of earnings and then they, "Hey, we like to deal with [inaudible]."


Nick: Yeah. As a quick edification on the process, typically, we'll prepare a teaser that has non-confidential information, talk about what the business does, very abbreviated income statement including EBITA, talk about why we like the deal, talk about some of the challenges. If they like that will get a non-disclosure agreement signed between us and them. After that, if there's a broker involved, we'll provide the broker prepared sim. We'll also prepare a sim that talks about, not only the company but what we plan to do with the company, why Four Pillars is the right buyer for this business, etc. After reviewing the sim, typically if there's interest, we would arrange a call with the with the sellers just to have a brief diligence call.  After that, we'll probably visit them in person. And after that, we prepare a LOI. Then, after the LOI, we'll get into diligence and where we initiate a quality of earning process, start drafting legal documents, perform an environmental, if it is a manufacturing business with real estate, that type of thing.


Jon: Yeah. I knew I asked you about brokers. They provide invaluable service, but sometimes you don't like the second hand information that I get better quality information direct from the owners. What do you do? How do you work with them?


Nick: Yeah. We work with them as best we can. Obviously, in any industry and any field, business brokers are people. So there's going to be a scale as to how effective they are. And we've certainly worked on deals where the business broker or investment banker is helpful to the process. We have absolutely worked on deals where the business broker or investment banker is harmful to the process. There's a lot of folks that much preferred deals that are not - companies that are not represented by a sell side advisor because they think they'll get us so much better deal, etc. We always try to pay a fair price. If we're looking at a deal. Well, we say, "Well, we think that's a 5x but since they don't have a broker, we'll just pay at 4.5x."


Jon: I don't think anybody does that.


Nick: Yeah, we never do that. So, my perspective, we're going to pay a 5X, whether there's a broker or not. It might sound self-serving but my advice is not always to hire a business broker because it's very hard to vet them in terms of who would be one of the more helpful ones as opposed to one who might be not as helpful ones. And so, if there were only amazing business brokers out there, then my recommendation would change. But, there're some good ones and there're some bad ones out there.


Jon: So at this point, you've made a 2 to 3 acquisitions. You've got the multiples down by what a manufacturing company is worth. And when you come to a company that's off-market and a cold outreach, what's your style in negotiating? Is it, "Hey, you send us your quality earnings[?], and you start carving out all kinds of stuff," or you just say, "Hey look, we think it's worth X multiple, and that's a fair price."?


Nick: It's more of the latter. At that point, it's more of just a conversation to see whether or not we're in the same ballpark. Sometimes we talk to business owners that are really just kicking the tires and their mindset whether or not they say this vocally or just in their head, anything's for sale for the right price. And so those usually aren't the situation that we're most interested in. And so, whenever we're talking, we'll talk about, typically for a company of this size and this industry, you won't be in the 4X to 6X range. Is that valuation in line with your expectations? If it's somewhat in line, then let's keep talking. If you're expecting an 8X or 10X or something like that, then you have a great company. I'm sure you're a great owner and CEO, but we're probably not going to be the buyer.


Jon: On your website, you talk about-- you're very strong at deal flow. What are you doing? Are you doing all of the above just to keep that constantly? Or cold outreach? Email, phone call, direct mail, networking. All of the[?] constantly.


Nick: All the above. It's one of those things where you never know. So much of this is just luck and timing. If we would have called those guys, the Dart guys, 6 months earlier, they might not have been interested. And so, you have to hit business owners at the right time. And how do you hit them at the right time? We'll, it goes back to one of our pillars of persistence. You've got to continue to reach out to them so that, even though in November of 2021, they're not too interested. However, they had a conversation with us so that in 6 months or 12 months, whenever we call them again, they might vaguely recollect the phone call. But now things have changed because if they're an aging business owner, maybe their wife or they've had a more serious health issue or maybe there's a new grandkid in the picture that lives on the opposite coast or whatever they want to spend more time with. At least whenever we're thinking about business owners that are getting closer to retirement, a year tends to be a quite a long time. And so, like I said, it just takes persistence in order to stay in front of them. So that whenever that timing does turn out to be right, they know of us, they've talked to us, they're more open to having an open and forthcoming conversation about potentially selling their business.


Jon: Do you think it's always some kind of life-changing event that gets him back on the phone and say, "We need to talk to Nick and Four Pillars"? Or like divorce or death or...?


Nick: I think that that's one category. But it's not the typical situation. To be honest with you, I would say that a life-changing event is less common. I would say less common except in the case of an owner wanting to spend more time with the grandkids. I think that's definitely a very important driver. Spend more time with the grandkids, or spend more time traveling with his or her wife. Those are two very common desires, reasons, for selling. Factored into that is how we talk business owners is that quite frankly, we think it's foolish if they just completely leave the business. They know more about their business, more about their industry than 99% of the population. So, if they just completely walk away, that's not exciting for us and we're losing a wealth of information. So, what we talked about with business owners is that we want to create a position for that business owner where all the stress, where all the annoyance, where all the aggravation is removed and they can focus exclusively on the areas of the business that they like to. Maybe that's contacting new customers or spending time with existing customers to deepen the relationship. Maybe it's new product development. Maybe it is adding automation to a manufacturing process. It's different for every person. But that's a big part of how we talk to business owners. We respect the business owner. We would be fools if we don't try to take advantage of how smart they are about their company, about the product, about the industry, etc.


Jon: On the Eagle one, the owner can have any more equity in the business. But the other two, did you guys consider a private equity model where the owner still keeps a percentage of it? And then your end game at some point, like there's a bigger fish out there. And go your 2nd, 3rd, bite of the apple might be larger than the 1st.


Nick: Absolutely. That's our game plan. One-hundred percent on all of the acquisitions were looking at right now. How we think about it is we don't even necessarily tell this to the seller, but how we think about, internally, is that, if we if we don't get the owner a bigger second bite of the apple, then first we feel like we have not done our job on that transaction. And we didn't do as good a job as we should have.


Jon: Yeah. So for that to happen, you can work backwards the numbers. I don't know what the equation is. You need to be doing organic growth, could be 5, 10% but your M&A needs to be 2, 3 businesses a year to be able to do that, I would think. Just a quick calculation.


Nick: Yeah. I wouldn't say 2-3 businesses per year. I would say, maybe  2-3 acquisitions in total combined with consistent EBITA growth. And the reason for that is, again, a lot of our deals that we look at are in the $3 to $4 million range.


Jon: EBITDA ? Yeah.


Nick: Three to four million of EBITA. And we transact at, let's call it 4 to 6. So, if we can get to even, let's call $8 or $9 million of EBITA, we would be shooting for a 7 to 8X at that point. And so, if we buy it at 5X and grow it to the point where, now, the average market multiple is, let's call it 8. Then that's the kind of situation where the seller will get a larger 2nd bite at the apple than the first.


Jon: Yeah, it makes sense. You can use 70 to 90% financing. We put some little down, but change your multiple and multiple from 2 to 4 to 7 to 8 in a 3 to 5 year period. That could be an amazing number.


Nick: Yeah. And partially why that works is, most of the groups we work with, not only provide equity, but they provide some of the debt as well. So, for example, Peninsula on some deals is the sole financing partner on the deal. And so they'll put in some debt and they'll put in some equity. And so their total check size is larger, but when it come to returns, the return on the debt is what it is. It's the interest rate that you signed up for, unless there's more in coverage or something like that. The equity, though, that's where you really have some benefit. And so, if we apply common leverage multiples to a private equity transaction and we pay off that debt for 5 years and we grow the multiple from 5 to 8X. There's no two ways about it. That's going to be successful for every party involved in that transaction.


Jon: What is the interest rate from private equity loans?


Nick: So, a private equity loan would typically be considered what's called mezzanine debt or subordinated debt or junior debt. And in this market, I would say, the average interest rate is probably low tins[?] in terms of, like maybe 12 to 14% in terms of current pay interest with maybe 1 to 2% peak[?] interest.


Jon: Is your plan to the end game is you get it to that multiples arbitrage 78 to find a bigger fish and then do it all over again? Or what's the next step after that?


Nick: Yeah. Really, we would do it all again. And to be honest with you, our preference would be to stay in the deal because we've been doing this not a long time. We've been doing this about 6 or so years and we've completed 5 transactions. For our view is, if you find a good company, why are you in such a hurry to get rid of it? We realized that since we since our private equity backers have a finite term for their fund that they have to exit. But for rollers doesn't. So, as long as the next buyer, if we were able to establish that positive relationship. They value Four Pillars in the deal, etc., then our desire would be to stay in that deal as opposed to exit.


Jon: And also these guys, even if you go - I know a guy that he was being funded by a $500 million private equity group. And then, was purchased by multi-billion dollar equity group. And, of course, he stood on because the multi-billion dollar private equity group only had 5 people working for them. They're not going to take over it. So, you're doing a great job. Just keep doing what you're doing.


Nick: Yeah. And that's what we look for. But truth be told, as you can expect, there are folks, there are private equity firms with people in them that are still good. But we weren't work well with. You know how it is. That's true of anybody, in any industry, any company, etc. So even though there could be a private equity group that is 10 times more sophisticated than us, better than us. They're still probably great people, we wouldn't disagree with that. But there's at least the potential for us to have different management styles, different vision or strategy for the business. All those things have to align for us to really feel like there's a strong and great partnership to be had.


Jon: So I'm going to ask you. I will just go back to your adventure here. According to your bio, you've worked for a lot of large corporations. What was your call to adventure? Does it say, "Hey, let's go out on our own. Start buying companies."? What was the moment you just, "We're doing this."?


Nick: It's a very good question. I kind of laugh because if there was a moment of realization, if you will. If you spend a little bit more time on my background, you'd see that the longest I've ever had a job after grad school was about 2 and a half years.


Jon: I noticed that. It was a short-term stays in company.


Nick: Yeah. So, Deloitte Consulting was the longest one that I work for and that was 28 months, not even 2 and a half years. So what I noticed over my career is that I get this job that had a lot of potential, it excited me. And a year and a half in, I started just getting really burn out, wasn't very happy in the job for whatever reason. And at the beginning, I feel  like, "Man, what's going on here?" This is another job where I get in. I'm not very excited. I don't feel valued. I don't have the seat at the table, etc. And so, it took a few of those before I started being a little bit more introspective and said, "Okay, wait a minute. Is it really the job or is it you personally?" And I think the reason why it took me so long to get there is because my idea of an entrepreneur was always somebody coming up with an idea for a better mousetrap or a killer app.


Jon: Yeah, the startup stuff.


Nick: I've never had an idea for a better mousetrap. Never had idea for a killer app. There's one guy that I'm very good friends with. He'd always be coming to me. He say, "Nick, I got this awesome idea." I'd be like, "Wow, that really is an awesome idea." It's like, how do you come up with those? That's just amazing. [laughs] But there's a term that has been popularized within the last, maybe 3, 4 years and it's called entrepreneurship through acquisition. That's the flavor of entrepreneurism that really resonates with me. It's the idea of buying a business and growing that business. That's exactly what I've always wanted to do is have an existing business and see how far we could take that thing.


Jon: During your career, who did you rely on for inspiration, advice, mentorship? Some people just use books and tapes and conferences. Other people just go, I went to my Dad and/or I just had this great mentor all my life, my uncle was wealthy. And sometimes it's out a distance, like we didn't really have a close relationship. I just watched how successful he was and what he did.


Nick: Yeah. I would say part of it has been intrinsic and part of it has been a few experiences from- I've been around and whatnot. At the beginning, though, at least a part of it, has always been intrinsic. I don't know if it was all the way in high school, but definitely in college. It was very clear. I have it written down that I wanted to be CEO of a Fortune 500 company. And I was mapping out the steps that I thought it would take in order for me to get to be a CEO of a Fortune 500 company. And so how that started was industrial engineering in undergrad. Didn't know where I would go from there. But knew, 2 to 3 years after I graduated, I wanted to get an MBA. And my uncle went to Harvard. And so my goal was always to go to Harvard. After I work for consulting, applied for a few schools, didn't get into Harvard, unfortunately. But did get into Michigan, which is a great experience. Very lucky to have that experience. And it was while I was at Michigan that I realized that 20 years at a Fortune 500 company might not really be the right path for me. And that's when I started getting exposed to investment banking, private equity, middle-market deal-making. And so that really drastically altered the path that I wanted to take after grad school. And it was really transformative, not just to my career but to my life.


Jon: I guess you couldn't come up with the next post-it note at 3M.


Nick: Yeah, exactly.


Jon: Yeah. When you're through your journey, I don't really have a lot more time with you.  What was the biggest stumbling block or challenge that fazed you and how you go through it? Just like, "Oh my God. I've never looked at it like that. Why did I waste so much time on that obstacle?"


Nick: Well, I wouldn't say why I wasted so much time. I would almost say why did other people waste so much time. And I say that partially in jest. But, I would say, one of the biggest challenges that my partner and I both have had to overcome, is that the perceived lack of experience that we have in pursuing the goals that we have. Whenever we were trying to buy Southwest Steel and I was positioning myself as the next president or CEO. I've never been president or CEO of a business. And so, I really had to sell myself, that I was the right person to run that. Saying, we had to go through the exact same process whenever we were involved in the Eagle transaction. My partner had never been CEO of a business. His background was even less manufacturing-related than mine was. And so, we had to convince them that his experience was the right one.


Jon: How did you do that? Like, "Why are you taking over my business? You've never been CEO. Where does that makes sense in my lifetime experience?"


Nick: It's not something that happens in one phone call. And I would say is it's a series of professional relationship building phone calls that ultimately gets the person comfortable that, "Yeah. This guy might be young but he has the maturity and the mindset, etc. that I think he's going to be successful running this business."


Jon: Well, Nick, it's already an hour's passed. I put you in the hot seat analyzing your deal. What are you looking for now? And how can we help, or my audience?


Nick: We are looking for companies, preferably in manufacturing or B2B services with about $3 to $8 million of EBITA that have an untapped potential for growth. And when we say that we really think about 3 different types of business owners that have that. The first type is the business owner that doesn't have the risk profile or investment price to rapidly pursue growth. Maybe it's an aging business owner that doesn't really want to spend the next 5 years working 60, 80 hour weeks trying to double the business. So that's one type of persona. The second persona is more like a technician owner who's done a great job at perfecting a product but doesn't necessarily have experience making the company more process and procedure driven as opposed to - Well, Joe handles - he's been here since we started the company. So he's a good job. On top of that, we always think about what would happen if we added to the sales team or created an outbound sales team for the company. And then, the third is an operator in a fragmented industry that has a lot of potential for growth via M&A. But doesn't personally have the experience or doesn't have a bench that has the experience to execute in the main strategy. So that's very high level. Those are the types of deals that were looking at. And outside of that we always like to have the calls with business owners because you probably know as well as I do, there are so many amazing stories out there. There are so many businesses out there that you just think, "Wow. That's really a business. That's great. And that's just amazing that you've been so successful as you are." And there's so many interesting conversations, interesting businesses, interesting people.


Jon: Yeah. There's a lot of the entrepreneurial spirit in what they build out there. How does the audience get in touch with you Nick?


Nick: Probably email is best. My name is Nick McLean again. And so my email is nmclean@four, F-O-U-R, pillars, P-I-L-L-A-R-S, investors.com.


Jon: Cool. And just go to fourpillars.com or he's on that link there too. Yeah.


Nick: fourpillarsinvestors.com


Jon: fourpillarsinvestors.com. And by the way, he's also on searchfounder.com. You can too. That's how we reached them. All right. Thank you, Nick. I'm going to stop recording right now.