The Four Pillars Culture That's Revolutionizing Acquisitions Today

 Summary

In this conversation, Jon Stoddard interviews Nick McLean, founder of Four Pillars Investors, discussing the principles behind his investment firm, the importance of relationships in business, and insights into the acquisition process. McLean shares his experiences in the manufacturing sector, the challenges faced in the steel industry, and details about his investment portfolio, including notable acquisitions like Eagle Precision and Turk Manufacturing. The discussion emphasizes the significance of persistence and strategic planning in private equity investments. In this conversation, Jon Stoddard discusses the intricacies of building partnerships with capital providers, the challenges of cold outreach, and the importance of trust in negotiations. He shares insights on the role of independent sponsors, the pros and cons of working with brokers, and the strategies for maintaining deal flow. The discussion also touches on the motivations behind selling businesses, the significance of creating value for business owners, and the long-term vision for growth and partnerships in the acquisition space.

Takeaways

Relationships are crucial for business success.
Manufacturing is a vital sector for the economy.
Persistence is essential in the acquisition process.
Valuation and structure are key considerations in deals.
The importance of working capital in acquisitions.
Hiring the right team is critical for business operations.
Understanding the market dynamics is essential for investment success.
Building a strong reputation can lead to acquisition opportunities.
Strategic acquisitions can enhance business capabilities.
Personal investment in deals reflects commitment and confidence. Building trust with capital providers is crucial for successful partnerships.
Cold outreach can lead to significant deals, but it requires persistence.
Negotiations often reveal the true motivations of sellers.
Independent sponsors play a vital role in the acquisition process.
Working with brokers can be beneficial, but direct communication is often preferred.
Understanding the timing of outreach is key to successful negotiations.
Life changes often motivate business owners to consider selling.
Creating value for business owners is essential for successful transitions.
A long-term vision can lead to greater opportunities for growth.
Identifying target companies with untapped potential is critical for acquisition success.

 

 Watch the Interview:

 

Transcript:

Jon Stoddard (00:00.706)
Welcome to the top &A entrepreneurs. Today my guest is Nick McLean from Four Pillars Investors. Just a little bio on Nick here. Of course, the founder of Pillars Investors, previously had GXP Investments. was corporate developer at a mineral company, corporate developer and treasury at FITE, supply chain consultant at Intel, corporate development at 3M, analyst at Deloitte, and he's got an MBA.

from Michigan and a BS from industrial engineering. So thanks for being here, Nick. Thank you. Thank you for having me. Tell me about four pillars investors, know, kind of why you called it that. I take it that, you know, there's there's four pillars of a four pillars of a leg or a coliseum or something. But tell us about that. What are those four pillars and what do they mean to your business? Sure, sure.

So whenever we were founding the business, we had a, there's a lot of different companies with capital partners and whatnot, and it's hard to tell exactly what they do. And so I talked to a few friends, associates, colleagues, et cetera, 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 needed to go back to the drawing board and figure out what a better name should be. And the process that I use is I feel like I'm very principle centered. And so I just jotted down a number of different concepts or principles that were really important to me. And I came up with a list of, let's call it 12 to 15, and really distilled those down into four that are not only important to me, important to the team, but they really show up

you know, 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. Yeah. So you, the four pillars are, I see on your website, relationships, challenge the status quo, servant leadership and persistence. Can you just tell me like,

Jon Stoddard (02:21.774)
about each one of those, why that was the most important in a pillar to you? Sure, absolutely. So I would say the perhaps the most dominant of the four pillars is relationships is a cornerstone for success. mean, 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.

Like we're not, don't take a transactional focus. We don't think about what's best for us and not care about the other person. I mean, we really want to form a bond with whoever we work with because we feel like if there is some sort of bond or relationship there, everybody is gonna be better off. And, you know, I'm not saying that that's gonna work for everybody or that's the one principle that will lead to business success. Cause I'm sure it's not.

However, it is important to us and we don't wanna be successful if we're not building solid relationships with the folks that we work with. How do you determine that to work with somebody? mean, do you put somebody through tests or is it naturally come up during your communications like, ooh, that was kind of prickly. I would not wanna be doing business with that guy or his style or maybe he's demeaning behavior or maybe he was rude to a waitress or something.

Yeah, I all those things. mean, typically, I mean, we haven't relied on profiles as much just because, you know, it's easy to, you know, 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 that 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

you know, to do a persona you know, sometimes we'll d a very late stage in our early on it wouldn't reall how do we, how do we dete really again, it's a lot I mean, it's, you and you know how they t know, are they openin and whatnot. You at the end we talk, we talk a lot,

Jon Stoddard (04:44.046)
However, when it comes to, you know, 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 actually. We tell them what those four pillars are. And if after we say those four pillars, there's just kind of like, yeah, that sounds pretty good. We realize that those pillars probably didn't resonate with that person too well. However, what is more common whenever we do, you know, strike a chord with someone is,

one of the four pillars will really stand out and they'll say, yeah, I I really like that approach that was really important and vital to what we do here at company XYZ, et cetera, et cetera. 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, dark casting.

Eagle Precision Sheet Metal and Turk Manufacturing. So you have four in your portfolio right now? That's correct. I well, actually, I would call it three. Turk is more of a bolt on to Eagle. And so it's really Southwest Steel, Dart and Eagle, which has two locations. Now you had you bought Nell Hills of furniture, but you accident that because

I don't know what that means except that it's a furniture company versus a steel kind of manufacturing. Didn't fit. Well, no, mean, yes, it was definitely more of an opportunistic transaction. So Nell Hills is an iconic retail store here in Kansas City. Growing up, my mom went there as well as the other folks that we did the deal with. And so 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 &A expertise on the team to try and get the deal closed and manage it post-close. so the husband who I knew before just asked if Four Pillars wanted to partner on him with it, said, absolutely. You expected that to be a long-term hold and just a steady income stream over the years.

Jon Stoddard (07:04.14)
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, 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.

That's cool. know, Warren Buffett bought that furniture company and still owns it. Yeah, Nebraska Furniture Mart. Yeah, there you go. So why this type of sector, steel, dark casting, precision sheet metal? Why is that? I mean, is your family from that type of or do you? No, I mean, very good question. So my background, my

Undergraduate degrees in 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. You know, as of late, it started to take place in more more sectors, know, the manufacturing type principles in more sectors. But again, historically, industrial engineers have worked for manufacturers. After after my undergrad went to work for a Deloitte consulting and was working with manufacturers there.

I like the manufacturing space. When I was at Deloitte, all the folks I worked with, we'd always joke about how we'll be working on a project for six months and there's nothing tangible that you actually create. Whereas that's totally different with manufacturing. Additionally, I just think manufacturing is very important for an economy, especially starting in the 80s and 90s, the US was going hard, the steering very, very,

you know, in a straight line towards more being more of a service economy. And we're still there. However, you know, with the pandemic with other, you know, global macroeconomic changes that are taking place, we really feel like manufacturing is 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. Yeah.

Jon Stoddard (09:27.454)
Let's talk about which one was the first one that you purchased? Southwest Steel. Southwest Steel. And how was that process? mean, what did you, how did you start? You said, hey, this is, we're going to buy companies between three million and 15 million EBITDA, got to do this. And what did that whole outreach start like? Sure. So this is, this is, mean, very good question. I mean, 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, I mean, we would we would talk to business brokers and investment bankers. We did some we sent out letters, made phone calls to business owners. We did general networking, et cetera, et cetera. This this deal actually was represented by an investment bank here in Kansas City, which is where Four Pillars is based. And

Our earlier deals were a little bit smaller. This one was very small as well, but it was local. We liked the opportunity. We liked the story. And so that's why we decided to pursue it. Yeah. Sounds like you use one of your four pillars as persistence. I mean, no question. You don't understand how many times I've heard no in my life. Yeah. so this investment banker

Was it in their portfolio or they just knew about it and they said, I'll make the introduction. I mean, this investment bank almost exclusively focuses on sell side engagements. So their clients will hire them to help them sell their business. Gotcha. So it was, would you say it was that the right multiple as what the investment banker did? How was that negotiation?

Yeah, mean, 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 &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

Jon Stoddard (11:49.197)
create a structure that 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 an SBA loan to help with the majority of the funding for that deal. What was that, 70 or 90 % of the purchase price? Something around 70%, yeah. 70%, okay.

How long did that process take? I had 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, you know, let's say speed was the opposite. Yeah, absolutely. I even even I mean, now I can only imagine what the process would be like just because anything, anything having to do with the government is is extremely log jammed and slow.

I mean, yes, did take a long time and that was, if we could have sped that up, the close could have happened more quickly. However, in any deal, there are lot of different work streams, 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. Just as a quick,

What did they, so what was average for the company and what did the SBA want or need? It was less what the SBA wanted because they're not too concerned about that. It was more what the sellers were comfortable with. At the smaller end of, like on more main street type transactions with EBITDA of 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.

Jon Stoddard (14:09.229)
And based off the history, based off the track record, based off 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. so ultimately we got there. It's just, you know how it goes. was a negotiation point that we had to come to terms on. And thankfully we were able to do that. Yeah. I I wouldn't go anywhere with a manufacturing company. Current assets minus current liabilities. That's what your working capital is.

Absolutely. Why would you deplete that or not conclude that because you're going to need a lot of equipment. Yeah, absolutely. Yeah. I mean, that's that's our point exactly. Yeah. It's like buying a car with no gas, you know, it's not going to take you anywhere. Why would you do that? So how is it going for Southwest Steel? I mean, you're the website says you increase efficiencies or operating capabilities. Has that happened? Come to realization? I mean, absolutely. I mean, we've we've you know, we

we haven't, you know, we've tried to grow, like what we've tried to do is we tried 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 labor, but we've bitten the bullet 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 four times what it was a year or so ago. As you can imagine, for projects that are

have a lot of steel on them. If your major raw material goes up four times, it's gonna put the project in jeopardy. And so a lot of our project, 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, you know, regardless, there's still projects getting released. We're definitely holding it around, no question.

Jon Stoddard (16:29.143)
Well, that's good. you said you purchased that or got an SBA loan 70%. I don't know what the loan SBA loans are what total max $77 million. So if you 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 find? You can't have seller financing with the SBA. Is that correct? No, you can't. You can't. Perhaps what you were thinking of is they can't they can't

retain any ownership. Yeah, that's right. Yeah. Are they still involved in the operation as a consultant? No, not anymore. They were the they stuck around for a year or so, and then transitioned out. You know, we were very fortunate in that the plant manager was in his he was he was, you know, top notch. And he's actually president of the company. Now, he's running the business and he's a part owner as well.

That was that a top consideration when you purchase a business if this guy leaves can the number two man step up? I mean yes, yes and no. mean we were we I mean he was definitely always considered a key employee. However, going into the deal part of the part of the thesis if you will was that I would be the one running the business. So I did step in as 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 really ascended to the role of president. So where did that other 30 % of financing come from? It was a mix of seller financing and personal funds from myself and my partner. Okay, gotcha. So what was the next one? Dart casting or Eagle Precision? 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 of 17. Okay, was that a lot? You said Southwest Steel was a smaller deal. Was this a lot larger? Probably about twice the size of Southwest Steel.

Jon Stoddard (18:53.045)
Yeah. Did you set that in your target? Say, hey, look, we, you know, 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. I mean, you hit the nail on the head. mean, for some, some folks are not as, as perceptive as you are. They think smaller deals are easier to get done, but that, that in fact is not true. mean, sometimes actually oftentimes.

larger deals are easier to get done just because you know the larger deals the companies are more sophisticated they have owners that have maybe been through an &A process before their cadre of advisors is more experienced in &A transactions so yeah I mean it's no more work to get a larger deal done a lot of times it's even less work. Yeah and he sourced that deal from where? It was from a business broker out in the

Pacific Northwest. Okay. Would that be John Martinka? Cause he does a lot of those deals in Pacific. I'd have to, I'd have to go back. My partner might, might recall the name, but I don't. And the price that you guys settled on, was it pretty close to the valuation of the banker or the investment brokers? I mean that one. So I'm trying to think that that deal did.

that the business broker did have a listing price for that business. that's pretty much where we settle that. has that, was it a fair valuation you would say? say, I mean, it's easy to say like when you're getting before you purchase, I think that's a fair valuation besides, I'm from the comps, but then you get into it and then you're like, crap, I would not have paid this much for it or we got a great deal.

Well, 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, that would have 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.

Jon Stoddard (21:13.815)
So that, like I said, that was down fast forward to about right now. And I would just say that, I mean, the future is very bright for these two companies. Tom has hired a very outstanding CEO, CFO, who's very knowledgeable of the industry. We are adding a lot of great people in very important roles. Our customers are seeing what we're doing in terms of buying new equipment.

adding square footage and you know, they're they're hitching their start to ours, so to speak. And so even even though, you know, just a year ago, we were all down because the acquisition went through. Fast forward to right now, we're all super excited about the what the future is going to bring for us. And have you guys increased revenue and EBITDA bottom line to I mean, not revenue. Yes, EBITDA not right now because we're we're we're growing right now. We're adding to the workforce.

in excess of the revenues that we're bringing in. Over the past two or three 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. Yeah, who are the biggest customers there from Eagle Precision? What type of guy? Is it government? it? Well, largely, so I wasn't familiar with this term, but part of the Pacific,

Pacific Northwest is known as the silken forest for a lot of, largely because of all the semiconductor manufacturers out there. Yeah, Intel's out there. Intel's out there. There's other companies like Applied Material, LAM, that all are in and around semiconductors. And most of our work at those companies is related to the semiconductor industry. interesting. So what was that, you did try to purchase a,

company, was a bolt on, now why would have, what was the gap that you were 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? Well, I mean, so I mean, 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,

Jon Stoddard (23:35.853)
If you can get to get to 5 million or more in EBITDA, then that opens up a much wider universe of potential buyers. And so since our background on this is a private equity firm, know, 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, you like I said, a wider group of private equity buyers. Our goal was to get to, you know, greater than 10 million of EBITDA.

So 10 million of EBITDA, 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 EBITDA are much higher. So they go from single digits, SDE to double digits by that time. And so that's a core part of our strategy is that we really like companies in the three to $4 million EBITDA range because you can typically

You know, if you're, you're diligent and you show discipline, you can, you can buy, you can buy companies in the 4X to 6X range with three or to 4 million of EBITDA. Then the next goal is to get that north of five. And if you can even take it from, you know, 5 million of EBITDA to 10 million of EBITDA, then you're going to have a very successful outcome. And so that acquisition that you had didn't go through or execute, but you did add.

Turk manufacturing bolt onto Eagle. What did Turk do that made sense for the business? 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 really you 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, et cetera, et cetera.

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 we were able to do that, close the deal successfully. it's been a great acquisition. Very pleased to have been able to.

Jon Stoddard (26:01.293)
get that one done. Was that a adjacency business that, what did it add to it? Did it add customers, IP or supply distribution or interact or act competitor? What was that? I mean, it really was more around horizontal integration. So Eagle was more of a sheet metal manufacturer and Turk is more of a CNC machine shop. So are you feeling familiar with what a CNC machine Yeah.

I used to work for Autodesk, so they built it. Yeah, yeah, absolutely. it was, 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. Yeah. So when the owner of Turb called the owner of Eagle, the previous owner,

and said how's it like to work with them? Was it because they were afraid because like if we do merge, this guy's gonna cut all my people and they're all gone and I love my people or? Yeah, I mean, it's that. This is a legacy. People associate this company with me. I don't want the company to have a bad reputation. I care about the employees. I care about the customers. It's some of all that, absolutely.

And how did you guys finance? Well, let's go so back to the Eagle Precision. Where did the capital come for that to acquire that? So the capital for that came from three SBICs. SBICs are small business investment companies. It's a program administered by the SBA where a private equity firm raises an amount of private capital. And that's matched up to two to one from government funds. Yeah, because you're outside the SBA seven at that point.

Yes, yes. And so the three SBICs that we worked with, KVCI out of Kansas City, Cones 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 was a little bit smaller investor is MidStates Capital also out of Kansas City. How much did they put in towards the acquisition?

Jon Stoddard (28:28.781)
thinking it was somewhere in the three to $5 million range. I can't remember the exact numbers, but somewhere in that range. did the rest come from? Is cash flow from the business or? debt. okay, great. At that point, were you still putting skin in the game personally or is it just all banks? no, 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 kind of say to ourselves, why are we even doing the steal if we're not willing to put our own money into it? Right, right. So how did you finance the Turk manufacturing? Was that from cashflow from Eagle or? No, that was, well, mean, it was partially just, know, Eagle itself invested into Turk, but it was the same three SBICs put additional capital to support the acquisition, as well as our senior lender,

went us more dead as well. Yeah. So what did they say? Did you always keep that door open and say, look, we have a bolt on acquisition. Would you guys be interested in that? And they just said, yeah, absolutely. Cash flow makes sense. Let's do it. Yeah. Yeah. mean, that's, that's, I mean, that's largely, well, let me set back. whenever we, whenever we first discuss this opportunity with the, with our backers,

We said that we're not going to aggressively pursue an &A strategy out of the gate. However, our goal was to grow by acquisition, you when the time was right, when the deal was right, et cetera, et cetera. So we had already teed it up that we expected to execute a few &A transactions. Whenever Turk came to the plate, the concept 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. And so 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 the opportunity, it was just like, this makes sense, let's do it. Yeah, well, that's how they stay in business is finding people. Yeah, I mean, they have to deploy capital. Yeah.

Jon Stoddard (30:46.477)
So the last one was dark casting. How did you guys come across that deal? Well, that deal is, mean, it's one of those things where it was a cold phone call. One of the folks on our team, her name is Monica, able to find this company and had an email and a phone number and got a hold of one of the two brothers that was the co-owner of the business.

you know, was able to strike up a conversation and definitely some ups and downs on that deal, just like there are on really 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 Mid-States. mean, they're all, all of our capital providers today have been absolutely great to work with. mean, you know, in this business, especially for a group like Four Pillars, I mean, 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. Yeah. 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? Two months later, three months later, six months later? I actually think this was around 10 months later. 10 months later. Yeah. And that's very slow. But part of the reason for that is, twice during the, twice two separate occasions during the process, the seller's backed out. And each time they backed out, it took a little while to...

to get the deal back on the rails, so to speak. Yeah. So they weren't in the market to sell. Then they started thinking about it and then they go through this process like, well, what do we, we, do we get rich? Like, you know, 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, what you're offering? Well, I mean, we, I mean, it was a negotiation. You know, we had, we had to go back and forth, but you know,

Jon Stoddard (33:11.725)
At the end of the day, they're, you know, let me, let me digress for just a moment. You know, sometimes you, sometimes you talk to business owners and they'll say, you know, we really care about our employees and you really want a good partner. And then you off, then you tell them what your, purchase price will be. And they'll say, well, this, this group over here offered me $25 more than you did. So he's going to pay me, you know, $10 million and 20, know, 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, know, lot of money does different things to people, It does changes. Well, you'll 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, you know, look, look, doesn't look favorably on them. The sellers at, at Dart, I mean, they, they are two standup guys. They really do.

care about their employees. They did not want a situation where they sold the family business and they came in and ruined the culture and the capital providers were micromanaging them. They still work for the business. We've helped grow the business. We've got new equipment. We bought another facility that added about 40 % additional square footage to the facility. I mean, so far it's just been a great investment.

big part due to the fact that the two brothers that really we backed on this deal have just been everything we thought they were and more. Yeah. So how did you find the capital source out of Detroit versus going back to SBICs? So Four Pillars is what's called an independent sponsor. so an independent sponsor is a private equity firm that doesn't have a committed pool of capital.

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

Jon Stoddard (35:36.333)
because of their approach and because of their viewed so well, their names got out there as a good partner to work with. And so whenever we were trying to arrange the capital, know, Peninsula was one of the first calls that we made. Yeah. And you send the DAC to them or the financials quality of earnings and they, you know, they, Hey, we like to deal with back with. Yeah. I mean, I mean, just, you know, just, as a quick.

edification on the process. mean, typically we'll prepare a teaser that has non confidential information, talk about what the business does, you know, how, you know, you're very abbreviated income statement, including EBITDA, talk about why we like the deal, talk about some of the challenges. If they like that, we'll get a non disclosure agreement signed between us and them. After that, we'll provide them, you know, if there's a broker involved, we'll provide the broker prepared SIM.

We'll also prepare a SIEM 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, et cetera, et cetera. After reviewing the SIEM, typically if there's interest, we would arrange a call with the sellers just to have a brief diligence call. After that, we'd probably visit them in person, and after that, we'd prepare an LOI.

Then after the LOI, we'll get into diligence and where we initiate a quality of earnings process, start drafting legal documents, perform an environmental, if it is a manufacturing business with real estate, that type of thing. Yeah, I got to ask you about brokers. I mean, they provide a valuable service, but sometimes I don't like the secondhand information that I get better quality information direct from the owners. What do you?

Do you, how do you work with them? Yeah, I we work with them as best we can. Obviously, as you know, there's, you know, in any industry, in any field, you know, business brokers are people. So there's gonna be a scale as to how effective they are. And we've certainly worked on deals where the business broker or investment banker, you know, is helpful to the process. We have absolutely worked on deals where the business broker or investment banker

Jon Stoddard (37:56.749)
is harmful to the process. I mean, we, you know, you know, sometimes, I mean, there's a lot of folks that, you much prefer deals that are, you know, companies that are not represented by a sell-side advisor because they think they'll get a so much better deal, et cetera, et cetera. I we always try to pay a fair price. You know, 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're just going to pay a 4.5X. I don't think that's, yeah, I don't think, I don't know anybody who does that.

No, we, yeah, we never do that. So like from our perspective, like we're going to pay a five X whether there's a broker or not, or not. And so, you know, I, know, I know it might sound self-serving, but I mean, my, my advice is, is not always to hire a business broker because you, it's very hard to vet them in terms of who would, who would really be one of the more helpful ones as opposed to one who might be one of the, not, not as helpful ones. and so, you know, if,

if there were only amazing business brokers out there, then my recommendation would change. But there's some good ones and there's some bad ones out there. Yeah. So at this point, you've made two to three 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 of negotiating? it, know, hey,

You send us your quality of earnings, 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. It's more of the latter. mean, it's more of just, 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 they're of the mindset, whether or not they say this vocally or just in their head that,

know, anything's for sale for the right price. And so those usually aren't the situations that we're most interested in. And so, you whenever we're talking, we'll talk about, you know, typically for a company of this size in this industry, you know, we'll be in the 4X to 6X range. You know, is that, you know, that valuation in line with your expectations? Is it, you know, if it's somewhat in line, then let's keep

Jon Stoddard (40:21.845)
Let's keep talking. You know if you're expecting an 8x or 10x or something like that then you know, you have a great company I'm sure you're a great great owner and CEO, but we're probably not gonna be the buyer Yeah on your website you talk about You're very strong at deal flow. I mean what what are you doing? Are you doing all of the above just to keep that constantly or what's like?

cold outreach, email, phone call, direct mail, networking, all above constantly. Yep, all of the above. It's just one of those things where you never know, mean, so much of this is, I mean, really is just luck and timing. If we would have called those guys, the dark guys six months earlier, they might not have been interested. And so you really have to hit business owners

at the right time and how do you hit them at the right time? Well, 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 six 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

maybe their wife or they've had a more serious health issue or maybe there's a new grand kid in the picture that lives on the opposite coast or whatever that they want to spend more time with. you know, whenever you're, you at least on the, at least whenever we're thinking about business owners that are, you know, getting closer to retirement, know, 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 a open and forthcoming conversation about potentially selling their business. Yeah, do you think it's always some kind of life changing event that gets them back on the phone and say, we need to talk to Nick and four pillars or like, you know, divorce or death? I mean, I think that that's one category, but it's not the typical situation. I mean, to be honest with you,

Jon Stoddard (42:45.881)
I would say that's a life changing event is less common. Well, okay. I would say less common except in the case of an owner wanting to spend more time with 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. mean, those are two very common desires about reasons for selling.

And, and, and, you know, factored into that is how we, how we talk to business owners is that, you know, quite frankly, we think it's foolish if they just completely leave the business. They're, they're, they know about more about their business, more about their industry than 99 % of the population. So if they just completely walk away, you know, that's, you know, that, that's not, that's not exciting for us. And we're just really losing a wealth of information. So what we talk about with business owners is that.

You know, 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 new, maybe that's, you know, contacting new customers or, 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. You know, it's, different for every person.

But that's a big part of how we talk about to business owners because the last thing we want to do, like we respect the business owner. mean, we will be fools if we don't try to take advantage of how smart they are about their company, about the product, about the industry, et cetera. On the Eagle one, the owner can't have any more equity in the business. But the other two, did you guys consider kind of like 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 second third bite of the apple might be larger than the first. Absolutely. mean, that's that's our that's our game plan. One hundred percent on all of our on all of the acquisitions we're looking at right now. I like we I mean, like how we think about it is we don't even we don't even necessarily tell this to the seller. But how we think about internally is that, you know, if we

Jon Stoddard (45:12.971)
If we don't get the owner a bigger second buy of the Apple than 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. Yeah. So for that to happen, I mean, you can work backwards in numbers. I don't know what the equation is. I mean, you need to be doing, you know, organic growth could be five, 10%, but your &A needs to be two, three businesses a year to be able to do that, I would think.

I mean, just a quick calculation then. Yeah, I wouldn't say two to three businesses per year. I would say maybe two to three acquisitions in total combined with consistent EBITDA growth. And the reason for that is, a lot of our deals that we look at are in the three to $4 million range. so like EBITDA, three to four to six, or three to four million of EBITDA, and we transact it, let's call it four to six.

So if we can get to even let's call it eight or $9 million, mean, we would be shooting for a seven to eight X at that point. And so, if we can buy at a five X and grow it to the point where now the average market multiple is, let's call it eight, then that's the type of situation where we would be able to, where the seller would get a larger second buy at the Apple than first.

Yeah, I mean, that makes sense. mean, if you're, you know, you can use 70 to 90 % financing, we put some little down, but change your multiple and multiple from, you know, two to four to seven to eight in a three to five year period. Yeah, that's a could be amazing number. Yeah. And partially why that works is, is most of the groups we work with not only provide equity, but they provide some of the 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, when it comes to returns, the return on the debt is what it is. mean, it's the interest rate that you sign up for unless there's some warrant coverage or something like that. The equity though, that's where you really have some benefit.

Jon Stoddard (47:30.541)
If we apply common leverage multiples to a private equity transaction and we pay off that debt for five years and we grow the multiple from five to eight X, that is just, mean, there's no two ways about it. That's gonna be successful for every party involved in that transaction. Yeah, what is the interest rate from private equity loans?

I mean, so private equity loan would typically be considered what's called mezzanine debt or subordinated debt or junior debt. you know, in this market, I would say the average interest rate is probably low teens with low teens in terms of like maybe maybe 12 to 14 percent in terms of current pay interest with maybe one to two percent interest. Yeah.

And 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 over again or what's the next step after that? Yeah, mean, yeah, really we would do it all again. you know, to be honest with you, like our preference would be to stay in the deal because, we know, I mean, we, you know, we've been doing this not a long time, but, we've been doing this about

six or so years and we've completed five transactions, our view is if you find a good company, why are you in such a hurry to get rid of it? And so we're not. We realize that since our private equity backers have a finite term for their fund that they have to exit, but for killers doesn't. So as long as the next buyer, if we were able to establish that positive relationship,

they valued four pillars in the deal, et cetera, et cetera, then our desire would be to stay in that deal as opposed to exit. Yeah, yeah, most of 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 a multi-billion dollar equity group. And of course he stood on because the multi-billion dollar private equity group only had five people working for him. They're not going to take over it. No, no. So you're doing a great job.

Jon Stoddard (49:49.741)
Just keep doing what you're doing. Yeah, and that's what we look for. there's, I but truth be told, I mean, as you can expect, there are folks, there are private equity firms with people in them that are still good, but we wouldn't work well with, you know, you know how it is. mean, that's true of anybody in any industry, any company, et cetera, et cetera. So, you know, even though there could be a private equity group that is, you know, 10 times more sophisticated than us, better than us, I mean, they're still probably great people. Like 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 of those things have to align for us to really feel like there's a strong and great partnership to be had. Yeah. So I'm going to ask you, I'm going to just go about your kind of adventure here. mean, according to your bio, you've worked for a lot of large corporations. What was your call to adventure? Did you say, hey, you know what, let's go out on our own and start buying companies. What was...

Like what was the moment you said, we're doing this? Well, I mean, it's a very good question. I kind of laugh because, you know, there really was a moment of realization, if you will. So if you look at my, you if you spend a little bit more time on my background, you'd see that, you know, the longest I've ever had a job.

after grad school was about two and a half years, not even that. I noticed that it was a short term stays on Model Souls Company. Yeah. So I worked, I worked for Deloitte Consulting was the longest one that I worked for and that was, that was 28 months, not even two and a half years. So what, what I noticed over my career is that I, I, get this job that really had a lot of potential really excited me. And, you know, a year, a year and a half in, I started just getting really burnt out. Wasn't very

wasn't very happy in the job for whatever reason. And at the beginning, I just kind of be like, man, what's going on here? Like, why, you know, 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, etc. And so, you know, it took a few of those before I kind of started, you know, started being a little bit more introspective and said, okay, wait a minute, is it really the job or is it you personally?

Jon Stoddard (52:05.577)
And I think the challenge for, I think the reason why it took me so long to get there is because my idea of an entrepreneur was always the, you know, somebody coming up with an idea for a better mousetrap or a killer app. Yeah. The startup stuff. Yeah. I've never had an idea for a better mousetrap, never had an idea for a killer app. There's one guy that I'm, very good friends with. mean,

he'd always be coming to me, he'd say, Nick, I've 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? I've never, like, that's just amazing. But there's a term that has been popularized within the last maybe three, four 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.

And that's exactly what I've always wanted to do is have an existing business and see how far we could take that thing. During your career, mean, who did you rely on for inspiration, advice, mentorship? mean, some people just use books and tapes and conferences. Other people just go, I went to my dad or I just had this great mentor all my life. My uncle was wealthy.

Sometimes it's out of distance. Like we didn't really have a close relationship. I just watched how successful he was and what he did. Yeah, I would say part of it has been intrinsic and part of it has been, you know, a few, you know, a few experiences from, you know, I've been around and whatnot, you know, at the, you know, at the beginning though, it's at least a part of it has always been intrinsic. Like even, I don't know if it was all the way in high school, but definitely in college, you know, I, I, was

very clear. I 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 two to three 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.

Jon Stoddard (54:23.883)
you know, after I worked for consulting, applied for a few schools, didn't get into Harvard, unfortunately, but did get into Michigan, which was, you great experience, very, you know, very lucky to have that experience. And it was while I was at Michigan that I realized that, you know, 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, I mean, transformative, not just to my career, but really to my life. Yeah. Yeah. I guess you were, couldn't come up with the next Post-It note at 3M. Yeah, exactly. When you threw your journey, I don't really have all more time with you, but what was like the biggest stumbling block or just challenge that faced you?

and how you kind of broke through it. I mean, just like, my God, I never looked at it like that. Why did I waste so much time on that obstacle? Well, I wouldn't say why I wasted so much time. would almost say why did other people waste so much time? I I say that partially in Jess, but I would say one of the biggest challenges that we've always, that my partner and I both have had to overcome is that the perceived lack of experience that we have in

in pursuing the goals that we have. You whenever we were trying to buy Southwest Steel and I was positioning myself as the next president or CEO, I'd 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. We had to go through the exact same process whenever we were involved in the Eagle transaction. My partner had never been CEO of business. His background was even less manufacturing related than mine was. And so we had to...

we had to convince them that our, experience was, the right one. You know, fast forward to the bar. How do you do that? It goes like, wait a minute, how, why am I letting this, I don't know, I don't know how old you are. Like 30 year old take over my business. You've never been CEO. Where does that make sense in my lifetime experience? Yeah. I mean, it's really, it's, it's not something that happens in one phone call. What I would say is it's a, a series of, of professional

Jon Stoddard (56:47.117)
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, et cetera, that I think he's gonna be successful running this business. Yeah. Well, Nick, it's already an hour's passed. I kind of put you in a hot seat analyzing your deal. What are you looking for now and how can we help, or my audience?

I mean, we are looking for companies, preferably in manufacturing or B2B services with about three to $8 million of EBITDA that have an untapped potential for growth. And when we say that, we really think about three different types of business owners that have that. The first type is the business owner that doesn't have the risk profile or investment horizon to rapidly pursue growth. Maybe it's an aging business owner that

It doesn't really want to spend the next five 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, that's, you Joe handles that. He's been here since we started the company. 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 a 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 &A, but doesn't personally have the experience or doesn't have a bench that has the experience to execute an &A strategy. that's very, very high level. Those are the types of deals that we're looking at.

Outside of that, we always like to the calls with business owners because you probably know as well as I do. mean, 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. it's really just so many interesting conversations, interesting businesses, interesting people. Yeah, there's the entrepreneurial spirit and what they build out there just always.

Jon Stoddard (59:11.915)
I mean, how do they, how does the audience get in touch with you, Nick? So, I mean, probably email is best. My name's Nick McLean again. And so my email is in mclean at four F.O.U.R. pillars P I L L A R S investors dot com. Cool. And just go to four pillars dot com or he's on LinkedIn too. Or four four pillars investors dot com. Four pillars investors dot com. And by the way, he's also on search funder dot com. can too. That's how we reached out.

Yeah. All right. Thank you, Nick. I'm going to stop recording right now.