Adam Torres and Nick McLean discuss private equity trends.
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Show Notes:
Four Pillars isn’t your typical PE firm at least partly due to their relationship-first approach. They aren’t about financial engineering or extreme cost-cutting but instead using their experience as entrepreneurs to help grow companies in terms of revenues and employees. In this episode, Adam Torres and Nick McLean, Co-Founder and Partner at Four Pillars Investors, explore current private equity trends and what business owners should consider when exiting a business.
About Nick McLean
Nick is one of the founders of Four Pillars Investors. Four Pillars Investors a private equity firm that purchases and operates businesses in the lower middle-market ($20M in sales to $250M in sales). their ideal acquisition candidates are companies with untapped potential for growth. The principals at Four Pillars have all been CEOs of these types of companies and have excelled at achieving EBITDA growth specifically and value creation generally.
About Four Pillars Investors
Four Pillars Investors is an investment firm that partners with entrepreneurs and investors to purchase and operate small, middle-market businesses that have an untapped potential for growth.
Four Pillars Investors is a Kansas City-based investment firm founded on four core values, or pillars. They believe that the foundations of success are built on relationships, leadership, challenging the status quo, and persistence.
It is their intention to work together to achieve shared success. Unlike other investments firms, they are not looking to clean house or restructure, but instead pride ourselves in finding creative solutions to build businesses that last far into the future.
Full Unedited Transcript
Hey, I’d like to welcome you to another episode of Mission Matters. My name is Adam Torres, and if you’d like to apply to be a guest in the show, just head on over to missionmatters. com and click on be our guest to apply. All right. So today’s guest is Nick McLean, and he’s co founder and a partner over at Four Pillars Investors.
Nick, welcome to Adam. Thanks for having me. All right. So Nick this is a hot topic, private equity lots of business owners and executives listen to this show and learning how to get, value, whether they’re exiting a business or otherwise super, super hot topic.
And I’m also interested to hear, what kind of trends you’re seeing in 2024 and really how people can respond to those. But just to get us kicked off, Nick, we’ll start this episode the way that we start them all. With what we like to call our Mission Matters Minute. So Nick, at Mission Matters, our aim and our goal is to amplify stories for entrepreneurs, executives, and experts.
That’s what we do. Nick, what mission matters to you? mission that matters to me is investing in companies and actually growing them so that it doesn’t just impact the owners and whatnot. You’re improving the lives of the people at the company, and you’re actually Growing the employee base so , you’re able , to allow people , to feed their families and whatnot, it’s not just about bottom line, we want to make a meaningful difference in our communities.
Wonderful. And I’m interested to get more into your model as well. So I know four pillars. I mean, it’s not , your typical P firm, let’s say just because of the relationship approach that you take. And also , some of the things that you’re doing in growing companies versus maybe just extreme cost cutting.
So we’ll get into that. But before we do how’d you get into this business? Like where did this all start from you? How’d you get interested in private equity? Well, it’s a little bit of a convoluted story. I’ll try and keep it brief. I always thought that I was going to work for a large fortune 500 company rise through the ranks and, and that would be that in business school, got exposed to companies in the lower middle market, learned about private equity, investment making, and all that sound really interesting.
After I graduated moved, worked in a lot of different roles all related to Mergers and acquisitions or private equity, but after 6, 12, 18 months in these roles, I lost interest and really started to dislike the roles. After one or two of those, you can chalk it up to bad luck. After 6, at that point you kind of have to start looking at yourself in the mirror, and I realized that, you know, having a seat at the table was important to me, and if I wanted a seat at the table, I was going to have to build the table.
I was going to have to bring my own seat as well. And at that point is when I got hooked up with my partner, Thomas Stanford, and we started launching four pillars investors, which was about 2015. What was it? Let’s stay in , that launch side of things. , for a moment or two, what was the vision?
Like, maybe what did you seen versus where you wanted to be? , what was the vision for the company when you, when you get started? Well, the vision at the beginning was quite simple. Actually, we wanted to buy two businesses, one for me to run and one for my partner to run.
The idea was that, , we felt like there were a lot of companies out there who could continue to grow, except that the current owners didn’t have the desire to grow. You know, they, they’d been working in their business 20, 30, 40 years. And Motivations change whenever you get closer to retirement age, , making that extra buck , or taking on that new customer or new product line, maybe a little bit more work than they want to.
They want to perform at that stage and certainly sometimes a lot more risk. Being at a little bit earlier point in our careers and whatnot, realize that, you know, our risk tolerance and investment horizon lined up more naturally to pursuing growth. And that’s what really excites us about the companies that we work with.
Hmm. That’s interesting. So now , you have this original idea. You’re thinking, okay, let’s get a couple of companies. , where does it go from there? , how does it evolve? Well, good question. So the company that I was running have been running it for only a year, 18 months and one of the local competitor came to us and said, Hey, we might be ready to sell.
Would you be interested in buying us? That’s amazing. And so, you know, we looked at it. Ultimately, they backed out for whatever reason. But there’s a lot of fragmentation in this industry , that was helpful to get us to start thinking about maybe we should pursue other types of companies in this industry in order to do a consolidation play.
So long story short, looked at a lot of companies, made a lot of offers. never really panned out for, many different reasons. But through that process, I realized that , I didn’t want to run a company that was making widgets. I wanted to run a private equity firm. That’s when our model shifted from just buying a couple of businesses for my partner and myself to run to transitioning to a real private equity firm where we’re going to make multiple acquisitions.
We wouldn’t be the president or CEO of these companies. However, we would sit on the board. We would try to affect growth and grow the businesses, albeit not as an employee. And so now you you’re in the private equity firm business and some of the things, and I’ll definitely have you elaborate on this cause I don’t want to assume, but from what I’ve seen you’re not necessarily going the, , strict cost cutting and efficiencies route.
And you’re not necessarily stripping companies like you’re trying, you’re trying to really grow them. , how did that. about? Like, where did that come from? Like your New Yorkers, your model is a little bit different, like the relationship approach and some of the things that you’re doing. It’s a little bit different.
How did that come about? Oh, it really came about through personal experiences as well. My undergrad degrees in industrial engineering. A lot of that’s about process improvement process standardization, lot about the typical cost cutting type initiatives that you hear about at one of the companies I worked for.
It was a pretty broad role , definitely worked on , some process improvement type projects and they were successful. Like on one project, we reduced the in process inventory , by 10 X or 90%. So , that’s great. Then you go to look at the income statement or even, even the balance sheet.
And it’s really hard to see how , those efforts impacted it. However, in another role at that company, it was more of a business development role. You know, I helped land a company, a customer that accounted for 10 plus percent of revenue prior to bringing this customer on. I mean, that’s easy to see.
And through that process, I realized that, yeah, I mean, operational efficiency, it matters, but if you really want to drive company growth, you drive company growth through building the top line, not optimizing your, your current operations. And that, that approach has really. Yeah. You know, permeated and it is pervasive through our diligence process as well.
You know, one of the, one of our taglines is that we, we look for an untapped potential for growth and that can show up in numerous different ways But as we think about The companies that we want to go after, we’ve got to be able to see that there’s a meaningful path for growth, because if there’s not, then that doesn’t mean it’s a bad company.
It doesn’t mean that it shouldn’t sell for a really great price. It’s just, we’re probably not going to be the best ones to, to own that business. Because again, trying to pour gas on fires and really ramp up the growth so that we can, you know, You know, take a company from, you know, 20 million of revenue to 40 million or 50 million or whatever the case may be.
And so speaking of the companies, let’s go further down that line. So you’re like maybe size of company like a niche type of business industry like like what are you looking for in an investment? Typically, , we’re looking for companies with at least, let’s call it 20 million of revenues earlier on.
We, look mostly at manufacturing companies. That’s partially because again, my degree in industrial engineering, , but also because, you know, I’m from the Kansas City, Missouri area. And in this area, you really can’t walk too far without running into a manufacturing company. So it’s a target rich environment.
However, after we started looking at companies in different industries, you start to realize, especially on a sales and marketing front, that there’s an overall lack of sophistication. Now, I don’t mean that critically at all. It’s just what we see a lot is , the owners get to a place where their processes have worked for them to get the company to a size that they are happy with.
And that’s great. I mean, , , it’s clearly worked for them because they’re on the precipice large scale exit. However, from our perspective, , we feel like there are some basic business fundamentals that we can implement. Whenever we become , the owner of the business, and if there are basic business fundamentals that we can implement that can increase , that can drive growth, that’s great.
Cause basic business fundamentals. That doesn’t mean that we’re , buying a, 5 million piece of equipment and crossing our fingers that the customers will really come. It’s just doing what we do, but in more effective ways and just thinking about how to do things differently.
Yeah, I like that. I love that you bring up , that marketing piece and just thinking about like how you want to grow the business and risk because a lot of people, especially the manufacturing spaces, , they built these companies over a long time and they’re, they’re heading towards retirement.
Right. And so as they head towards retirement, do they necessarily want to take more risks? Do they want to explore markets? They want to, like you said, it’s been working for them. I had probably like two years ago now I had this gentleman on the show who. They purchased a ball bearing, company out of I think it was I forgot and it’s definitely in the midwest But I don’t remember what state it could have been wisconsin.
I could be off though But anyway, I remembered, having this conversation with them and the company was doing well Everything’s good. And but one of the things that they never considered was, like their marketing side and after Creating like let’s just say marketing side and upping their brand they ended up Developing this huge international international side of the business, exporting their product that they never even considered from inbound leads that had come in and it totally changed the complexity to where, let’s just say before that, before they started that marketing, , they might’ve been doing like 80 percent of their business domestic and 20 percent international, and it flipped, like it totally flipped because there was such demand for what they had over like five years, it flipped.
And their size, their business grew. It didn’t mean that they lost , that domestic base. Didn’t mean that at all. It’s just that they didn’t even know there was a demand , like internationally for, for their exact product and for what they were doing, like until they started going down to doing some marketing that hadn’t been done before and they.
Stumbled upon this whole other stream that they had no idea. So I, I like it. I like it. I feel like what you’re doing is amazing. Cause it’s really building. It’s not about stripping away necessarily. Not saying that something, if something does need to go, I’m sure it goes, but it’s about building, it’s about creating jobs.
It’s about figuring out new ways to add value. And so I, I think that’s interesting. Well, I, I appreciate that. And we didn’t encounter a scenario where , the sellers were, were looking to grow and we’re pursuing some new sales and marketing techniques, but , there’s a cautionary tale with one of the companies we purchased a cautionary tale for a lot of, business owners out there that are maybe getting not complacent, but not too, not too interested about growing.
This business had a great customer, very, very large customer in terms of, , total revenues and whatnot. And the, our, the company that we purchased, they, he just didn’t want to grow with their customer. And , his belief was that the customer was going to stick around, that they weren’t too concerned that he wasn’t buying new equipment or , adding labor or whatever.
Once we get in there and we’re operating it for a few months, , we have a sit down and after, after we build the relationship a little bit to where they feel like they can be honest with us, they came clean and said, listen, we’re trying to find a replacement vendor for you guys, because you just won’t grow with us.
And that was a, that was a tough message to receive them to realize that , it was all hands on deck to try to. Prove to this customer that, you know, what they wanted is exactly what we wanted. Fast forward a few years and it’s a great customer. It’s a growing customer. , and I mean, really just a lot of green shoots and a lot of optimism there.
But to go back to the, cautionary part of this example. Is you had a business owner that had this false sense of security that he could just keep things going as they were and nothing would ever change. And, , I guess he, he got out at the right time and, and things , did work out, but if he had needed to keep the business for another two or three years, he could have been in a much worse situation.
Yeah. And I think that’s a great transition to my next question actually. And really that’s maximizing value. So that you can get the highest possible price as a business owner before you exit. So that guy got lucky. You’re right. He was on buying time and man, , if he would, if that.
Customer would have been gone, geez, devaluation. I don’t know whatever the percentage was of that revenue that that customer made. That customer is gone. Like even just the look of losing a customer like that. Now he might not even be able to exit in the near future. Just playing that scene out because you don’t want to show that like massive decrease in revenue.
It’s a big negotiating point, right? For whoever’s looking to buy it, if you lose something like that. I guess taking the other side, opposite side of this, this is a good transition. As I mentioned adding value to the business so that someone can exit it at the highest possible price. Like, what does that look like in your experience?
Well, that’s a hard question to answer in just a few moments. So , I’ll maybe just hit a few high level. First off, if you think about a private equity buyer, or really any buyer, they’ll, they’ll ask a lot of questions, but what they are going to be most concerned about is consistency in revenues, consistency in costs, and ultimately consistency in cash flow.
If you are able to help show potential buyers how consistent your revenues are or have been and will continue to be, that’s, that’s a great first step. You know, oftentimes , we’ll talk to business owners and they, , say, well, , how are you doing this year? Oh, pretty good. How are you doing the last?
You know, three or four years. Oh, I mean, this, this business is steady as she comes. And then we look at the numbers and then the numbers tell a totally different story. We’re just, you know, then, then it’s okay. Now what’s going on? Like, was he just, not embarrassed, but did he just not want to show us that there’s more volatility or , does he really think that .
This suggest a level of consistency , or what’s the story here. It’s just , the red flags go up, again, not because we think there’s being anything, you know, dishonest or anything along those lines is more just, , we’re going to have to do the analysis because in our view, , the business owner , has not done the analysis that we would like to see.
Whenever, as it relates to specific advice or counsel, what I would say is You’ll be up front, you’ll look at your numbers. And if the numbers bounce around, , try and understand why they’re bouncing around. , , and I would also encourage folks to not be apologetic about their numbers, but also be willing to say that You know, things could be improved.
And if are, things could be improved, what would go a great way with any buyer is to say, here’s an action plan that we have developed in order to address some of the inconsistency in our numbers. We’re not all the way through this action plan. It’s got five steps. However, we’re two or three steps through, and here are the preliminary results.
I mean, , that type of proactivity. I would be, incredibly impressed if I, , had that type of conversation with a business owner. That makes a lot of sense. , and looking at like , the owner and the business itself, or I should say whether it’s a founder, owner, whatever what are you looking for in terms of that, partnership as you go to acquire that business, like, are you looking for them many times to stay on for a bit?
Is it like, like, what is your philosophy behind that? I’ve seen a lot of different structures. what I would say is that, generally speaking, we value what , the , founder, or the current owner has done in order to get the business to where it is today. We feel like we would be egotistical or even foolish if we just bought the business and said, you know what?
You’ve done a great job, but we’re so smart we’re we can take it from here. , , go get an extra beer on us , or whatever. I mean, that’s not our approach at all. I mean, , we are collaborative. We want people , to continue to be interested , and form that long term relationship.
Something that’s happened on, in numerous conversations with business owners before is, once we, , got fairly far down the pike, We’d start talking about our growth initiatives , and what we were trying to do and something in the business owner changes and , , these aren’t exact words, but , the general message is that, wow, you guys are, You know, nobody has been this excited about my business since I was 10, 15 years ago.
All this stuff sounds really great. And I’m, I’m really invigorated by this process and man, , I’m kind of looking forward to, to working together , and trying to, To grow this business, once you purchase it, that’s, that’s not an uncommon dialogue that we’ve had with business owners. Yeah, I can see that to have,, resources help , and other a vested interest, right?
From an outside party that is into growing businesses because depending on the business owner I don’t want to stereotype But maybe some didn’t have even that business background in the beginning. They were experts in their field. They built their business brick by brick. By brick. And over time that grew into something substantial and they may have never even had that outside vantage point.
Right. Like for some, right, right. So even the possibility side, I can see how that can be kind of infectious, like, wow, like what are the plans or how, like, Oh wow. This is possible. Yeah. This is exciting. I can see that I can see it completely. Yeah. Oh, well, Nick, I just have to say, this has been a lot of fun having you on the show.
I learned a lot. I’m sure my audience did as well. That being said, if somebody’s listening or watching this and they want to follow up and they want to learn more about what you’re doing over at four pillars investors how do they do that? Well, definitely you can check out our website. It’s four pillars, investors.
com. The four is spelled out F O U R. But if you’d like to learn about more business topics and how we think about strategic planning or growing businesses, I mean, they should probably check out my YouTube channel. It’s at Nick. Four pillars, F O U R P I L L A R S, have a wide variety of topics from business case studies to how we do strategic planning, how to grow businesses, et cetera, et cetera, that I think is intended to be a good resource for business owners.
Fantastic. And for everybody listening, just so you know, we’ll put the links to that in the show notes, so you can just click on the link and head right on over. And speaking of the audience, if this is your first time with mission matters and you haven’t done it yet, make sure you hit that subscribe or follow button.
This is a daily show again, daily meaning. Each and every day we’re releasing new episodes, bringing you new thought leaders new, amazing stories, and hopefully more inspiration to help you along inside in your journey as well. So I want you to get that notification tomorrow when we released the next episode, again, definitely hit that subscribe or follow button and Nick.
Thank you so much. I appreciate all you do. And thanks again for coming on the show. No problem. Thank you.