Ep 514 Inside the Mind of an Acquirer: Lee McCabe on Why the Old Private Equity Playbook Is Dead and the New Model Emerging

Hi there and welcome back to another edition of Built to Sell Radio, the podcast designed to help you punch above your weight in a negotiation to sell your company. Today's episode is part of our Inside the Mind and Acquire series where John sits down with Lee McCabe, a former Meta and Alibaba executive who went on to work in private equity and now advises PE firms on how to modernize the way they create value. McCabe argues the old PE playbook of buying cheap, piling on debt and waiting for multiple expansion is dead. With interest rates higher and investors demanding more, the firms that win will need to act more like operators than bankers. If you're planning to sell and private equity is your likely buyer, you'll want to hear today's episode. You'll discover why the buy at 8X and sell at 12X model no longer works and how top firms add value from day one and the questions that reveal whether a PE buyer will be a true partner or just a quarterly spreadsheet reviewer. Without further ado, here is John and Lee McCabe. Enjoy. Lee McCabe, welcome to Built to Sell Radio. Hey, thanks John for being here. You are stirring the pot on LinkedIn, my friend. I love it. You and I have lots of kind of common folks and I've come across your posts and everyone has like 700 comments and a thousand likes or whatever, and you are a very provocative and connoisseur of what the world of private equity is going through right now. So I appreciate you taking the time to talk with us. Pleasure. I think there's a lot of noise on LinkedIn and it turns out if you are authentic, it gets a lot of engagement. Yeah. And I want to read from my listeners a quote from one of your posts. Before I do that though, I just want to level set on Claymore and how you became in the private equity kind of universe, kind of walk me through in the mountaintops, how you became involved in private equity. Sure. So my program was all digital, I was with eBay, Expedia, Metta, Alibaba, general manager and for big tech, big digital businesses. Alibaba really opened my eyes to private equity in a number of ways, it opened my eyes to the grasp that PE had across a lot of industries, a lot of businesses, and it also opened my eyes to how not digital PE was and that just took me to being crazy at the time. There was still a line on the old levers they've had in the views for a long time and being a digital guy, I thought it was crazy that they weren't thinking that digital should definitely be the top three levers that we use for value creation across these companies, across B2B, across manufacturing, across home services. That's very important, D to C. Why would you at Alibaba and Expedia and Metta have visibility in a private equity? Because those aren't private equity back companies, those are obviously all public. How did you come to observe private equity? Because one of the parts of my role as head of North America Alibaba Group, I was pitching all the major brands in the U.S. to sell into China on the Chinese platforms like Timo, and all these major brands I was pitching, I normally had to go talk to the board as well, and the majority of the boards were PE guys. And you saw these guys who just didn't know anything about digital? Pretty much. I won't say nothing, that's not true, but it certainly wasn't a priority for them when they thought about value creation. Yeah, when we interviewed Adam Coffey, the guy behind the private equity playbook, he talked a lot about multiple arbitrage, he talked about bigger companies get better multiples, he talked about getting rid of all the inefficiencies. Are you saying, yeah. Yeah, yeah, all sort of B school kind of strategies. Exactly. And so I want to read from my listeners a LinkedIn post that you made, and let's let me read it here because it again broke the internet as far as I could tell. What made private equity successful over the past 20 years will not make it successful over the next 20. The old model was deceptively simple, load up on cheap debt, buy a business at 8x, sell it at 12 times, slap on a board of gray haired CEOs, had a 100 day plan, mostly cost cutting and vague, quote, strategic priorities, hope the market bails you out with the multiple expansion. That model worked and it worked very well, but the tide has gone out. Interest rates are no longer zero, multiple arbitrage is no longer a strategy, and LPs are no longer content with glossy PowerPoints and IRR math that looks better on paper than it plays out in cash on cash. Private equity is shifting from capital deployment to capability deployment. The firms that win going forward will A, build value for day one, not year three, rely on operating leverage, not just financial leverage, have real sector expertise, not just theme and a banker, invest in demand gen, not just EBITDA margins, track attribution like public equity desk, where did the actual alpha come from, quote unquote. In short, the next wave of app performance will come from firms that behave more like industrial builders than investment bankers. The question is how many firms can evolve fast enough before the old playbook stops working entirely? The deal toy clock is ticking and that got hundreds and hundreds of comments and likes. Why do you think that resonated so much with your followers? I think it resonates because there are not many voices in PE because when you work in PE, you're locked down by the GC and you can't see anything. Define the acronym GC for folks. So when you work for a PE firm, you can't see anything. There's obviously good reason for that, but you definitely can't voice your opinion on social media anyway. You're not really allowed to be on social media or like things. So what I discovered actually by surprise now with my own firm, I can say what I want and it resonates because it turns out a lot of people are thinking this, but they're locked down from actually seeing anything themselves. It's fully on LinkedIn. I get a lot of likes, but I get more messages from people who can't like the posts, who say, "I need to send you a DM and tell you what I think of the post and how it resonated with me." So that's the dynamic. Hey, it's John. Look, if you're building the cell, I want to let you know about a resource you may find helpful. It's called the Value Builder Score and it will evaluate your company in the same way that acquires will look at your business. It will give you a score on the eight factors that drive the value of your company. You'll also get an estimate of value and things you could do to improve that value over time, whether you want to sell now or in a decade from now. Knowing how the movie ends, I think puts you in the cat bird's seat, gives you all kinds of negotiating leverage. So it's available exclusively through a Value Builder Advisor. So talk to your advisor. If you don't have one yet, you can go to valuebuilder.com/score. Let us know what industry you're in and we will connect you with an advisor who specializes in companies like yours. Just go to valuebuilder.com/score. Interesting. And what message in there do you think hits a chord? I think one of the broader themes in that message is, look, what worked in the past is not going to work in the future. Is that just because interest rates are up? I mean, will it go back to working when interest rates go back to what they were a couple of years ago? It's definitely a factor. So the time of free money has gone away, which means a lot of these strategies about just acquire, acquire, acquire, build the business, that went away and was a shock for some firms. That means you have to focus on operational value creation. You have to build organic growth on what you have. And that wasn't the norm for most PE firms. Again, they've done well for a long time. They weren't focused on that organic growth and they didn't move fast enough. I mean, there's a few things going on. I mean, culturally, the whole operating partner role in these companies, if you ask 20 firms what an operating partner does, you'll get 25 different answers. I think firms have struggled with how to leverage that. I think there's a cultural play at work there as well, where these guys really have the power of influence. They can't go in and fix the companies. And I think going forward, that has to change. I think you have to get in there day one and fix these businesses. I think I believe there are some firms that do that, more the tech focus firms like Tom McBravo and Vista who will buy your company and will say, look, we bought you for a reason. We saw the opportunity and we know what we're doing and we've done this 20 times before. So on day one, we're going to put these playbooks in place and we're going to create even more value for you. And I think if you approach it like that, that should be well received, certainly by the business and the CEO. But I think they're the minority. Tom McBravo and Vista Equity Partners have been specializing in softwares of service, as I understand, and they've got to get a six-digit NAICS code. They've got a very, very, very highly targeted industry specialization. We've had people on this show that focus on acquiring garage door businesses and HVAC companies, all very specific industries. But the thing is, and I work with a lot of those businesses now, I like consumer services, I like home services a lot. That's a huge opportunity for value creation. Very resilient businesses and resilient agencies that are fragmented and have really worked on traditional methods, they haven't digitized as fast as they should. But there are really some foundational things that every business should do. It starts with the tech stack and still most businesses don't do this. If I was a CEO, it would be the thing I would want to do on day one. It should be the serve for the PE family to say, look, here's what we're going to do. One, we want to understand the business, and we want to understand the customer journey of your business and your model. A lot of companies don't understand that, which is crazy. It's not hard to map out. You would want to understand how your customer comes in the funnel, how you convert them at every stage, ultimately, how you transact and make money from them. So you say, let's look at the customer journey. And then you say, right, let's look at the tech that we are built on, the ERP, the CRM, the marketing automation, software, everything. And you ask two things of that. You say, one, do we have the right tech stack to make this customer journey efficient and effective as possible? So we're communicating, we're converting at every stage, and we're getting the data. But two more importantly is to say, do we have a business built on data? And any company can do that now, building the right tech stack, you would want to say, and we put this tech stack in place, so I've got 2020 across everything in my business. I've tagged everything. I've tracked everything. I know where every phone call comes from. I know where every web form comes from. I can see the funnel in detail of how I'm getting customers, how I'm converting customers, how I'm monetizing customers, how I'm putting that customer back through the flywheel to return them, to upsell them, to cross-sell them. I mean, that should be the foundation, no matter what business or industry you're in. That should just be foundation 101 or something you would want to do on day one. But I think most founders know that stuff intuitively. They've got it in the back of their head. And from what I've seen, that's part of why private equity acquisitions fail, is because they fail to mine the call of the instinct of the founder. The founder comes to know what the funnel is in their head. They haven't mapped it out in the way, in the rigor you're describing, but they know it. They know that, you know, I get three referrals from this guy, and my website does this, and they kind of know intuitively. It's not scalable, but it's in their head. And then they pass their business off to private equity, and private equity comes in with these clinical models, but they lose the essence of what made the company successful in many cases, because they're trying to graft very objective sort of business school models onto an instinctive leader's business. So look, I don't think it is. One, it's right what you said, it's not scalable. And to be an attractive business for an investor, you need to be a scalable business. So to say, the founder knows the funnel, and he's got it on his head, that's great. And it's got you to a point, which is awesome. It's got you to a point where you've been able to exit your business and sell your business. And that's usually impressive. But if you think about the next whole period, you want to scale that business as quickly as possible. And you can't rely on what's on the founder's head to do that alone. So you do need systems in place, and you do need data in place. And also, just beyond putting the basics in, with of course, the world of AI, which we live in now, which is largely noise, we're going to hit all over by AI can do everything. And it will, at some point, but it can do certain things well right now. To even win the right to get good at AI, you need the data. AI is not a magic wand. Right, you can't just put that on a business with no data and no tech stack and expect it to perform. It's a shiny object right now for most people. I remind a lot of companies or have in the past that you need the right to win to play in this. And you haven't even got a tech stack, you don't even have a CRM. Excuse me. So what data are you going to give AI? So I think the tech stack and the data is just a hygiene factor. If you really create a great business that's going to scale going forward and be able to take advantage of all these future technologies on the ground, you need a tech stack built for data. So the old playbook was, hey, we're going to use a bunch of debt, we're going to buy you at 8 and sell you at 12. What you're advocating here is, hey, there's going to be more than just multiple dollar charge play. What you've got to learn how to do is execute as a private equity group. You've got to take the instinctive leadership of a business owner, make it scalable. And I guess my question would be, if it were that easy, why wouldn't the business owner put their own processes in place and kind of keep all the equity? Could they take your advice and do it without the private equity group and just basically retain all the equity? Yeah, absolutely. And I think it's just, look, the majority of founders I meet who look at a huge successful and have built great businesses are not digital guys. So they've typically built these businesses on brand and it's been a traditional media. A lot of the cases I see have built on huge TV campaigns and radio campaigns and direct mail, especially home services. And they've built a great business. They've just been slow to move into digital and for some reason, reticence to move into digital. Well, I think part of that reticence comes from the way they perceive their success to be derived. So when I talk to business owners, let's use home services as an example, I say, look, I'm, what makes you different? Why should I use you as a roofer and not the other six roofers that came up in my internet search? I'll say customer satisfaction. I give great customer satisfaction. That's why you should pick me. That's why my customers pick me. Best customer satisfaction. But that's just the component of it. The good customer satisfaction creates a flywheel, a few reviews, which gets you more customers. But that audience that is available to you on digital is massive and you need to be found. And it's very easy to be found by being good at digital. And look, I mean, I'll ask you, whenever you look for something now, where do you go first? Whether it's a product or a service? I use AI now, but I used to use Google. But we're using digital, right? That's right. Yeah. But typically it's Google. It's Google, if you're looking for a product, it's Amazon. So, I mean, the world goes to digital first, whatever I'm looking for, that means you've got to be found. If I'm looking for a roofer in Greenwich, you've got to be in the top three. So, you've got to figure out where you're getting there and profitably be in the top three. And that's how you win a lot of business. That's how you win everybody searching for roofers. Now, of course, it's your job to provide a great service. And there are benefits of that because you get that customer coming back. You get word of mouth. That customer will leave a great review. That creates even more business for you. But it still starts at that top of the funnel, which is massive. So, that funnel is for people looking for you. You've got to be found. And that actually translates to B2B now, which is another big opportunity. And B2B change because it used to be, if you want a business buy to find your product, it's all conferences and trade magazines, a lot of relationship building and steak dinners. Well, B2B just follows B2C. So, if you think about all the buyers in B2B now, where do they go? They go to Google first every time. So, it's just as important for B2B. So, it's important for you to fill that top of the funnel. Brand is great and you always need brand in there because brand supports everything else. But it probably should be 30% of your budget. The rest should be digital. I want to switch gears and talk about private equity companies. You mentioned Vista and Tom O'Bravo, but there's obviously a wide range. What's your sense of the typical psychographics of a partner in a private equity company? Paint the picture. Our listeners are busy running their company, right? They've been building something for 10, 20, 30 years. It's a successful company and they probably just started to become aware of this group of people out there, these mysterious people in the night who are called private equity partners or private equity individuals. And it just seems like a vague constituency. Help them unpack them for them. Who are they? How do they think? Where do they go to school? Give me the short description. Look, I've found friends with a lot and work a lot. I've got a colleagues who are on the deal partner side and it's a paradox. One, the smartest people in the world, but also the simplest. If you think about it, they're making attempt decisions every day and the currency in private equity is judgment. Do I buy this business? And if I buy this business, can I hold it for four years and exit for a multiple and a price that works for me? So if you think about all these variables going on, it's not just do I buy the business, all the vendors coming to me offering you services, you really boil it down to two things. Is this going to make me money or is this going to save me money? That's the question you ask every time and hopefully the data is there to give you an easy answer. If it's not, it's judgment. And when you buy your business, you spend a lot of time on the diligence, looking at that business, looking at the concept, looking at previous purchases and you look at all the data you have. And look, sometimes that's not always great. You always get surprised when you buy your business. There's always something you missed or it's dead or wasn't there, but you spend a lot of time on the diligence. You look at everything you have in hand and then you make a judgment. And the judgment is if I invest X in this business, which is coming from the LPs that have given us this fund, so I'm investing their money, if I invest X of their money in this business, do I have a high degree of confidence that I can exit this business in four to five years and add value and make 2.5 to 3X my money on this business? So it's a very, very financial view and it's an investment. The 2.5 to 3X my money, that's the equity they're putting at risk, not the debt they're under, is that correct? Got it. So they're going to say, they're going to put a structure together that involves some of their equity, some debt that they get and maybe an equity role on behalf of the owner that is selling out. Yeah, and so for people not versed in PE, it's like buying a house, pretty much the same. So I'd buy and flipping a house. You buy the asset, you buy the house, let's say it's $100,000, you put $20,000 down of your own money, you take $80,000 in debt. You hold it for four years, hopefully the market goes up, the rising tide raises all boats or private equity holders like spending on successful and buoyant markets. But you hold the house for four years, you probably do some improvements to the house, you might add a pool to the house, you add value. And after four years, you sell the house for $200,000. And that $20,000 has returned $120,000. Because you put as much, as little as you possibly could in that risk. You probably pay down the debt as well, your mortgage, you've paid down the debt with your mortgage as well. So please, pretty much the same. How do they go from the kids who call me and say, "Hey, would you like to sell your company?" to becoming among the most intelligent, smartest, best judgment people on earth. Here's what I've experienced. The top end of private equity, the Tom and Brava partners, the Vista, eight of those folks are, I would argue, as you described them, among the smartest people I've ever kind of interacted with. Yet, on the bottom end of the ladder, the kids that get recruited out of university and they're kind of thrown the proverbial phone book. Of course, it's not the phone book, but it's the internet. And they start calling. Their pitches are pretty obtuse. They're not well thought out, they're just dialing for dollars. What's the trajectory between a 23-year-old who doesn't know their head from there, whatever, to a partner at Vista? How do they go from there, from being kind of as naive and ignorant about what are, because a lot of my listeners get calls all the time. They're getting flooded with calls. And they hang up within three seconds, because the person on the other end of the phone hasn't even done the most basic element of due diligence. They don't even know what industry they're in. They're just calling. They have a very bad taste in their mouth about private equity. Yet, I think if they saw some of the people you're talking about, the partners, they would be impressed. So, tell me about that journey. It's two things. I think it's very different. It depends on your EBITDA who you're getting approached by. If your EBITDA is on the lower end, then you're probably getting approached by small business brokers. And I think that in issues like the Wild West right now, anyone thinks there can be a small business brokerage. Accountants who think they can do it, lawyers who think they can do it. I think it's broken because they probably take fees up front. I think it's unfair. Any deal like this should be, we don't make any money unless we transact. I think the quality of the relationship with that business is shaky. And I think the materials about it, you look at sims, which are ostensibly pitch decks. If you want to sell a business, you pull a deck together, a sales deck for that business. Most of why I see small business brokers look like my 12-year-old pull together. And that's insulting my 12-year-old. I think that's really the bottom end. Your other question, so once you start moving into middle market PE firms, you join as a associate and usually it's a fight. Every recruiting season, it's a fight to get the smartest that you're going for, the smartest kids from the best schools. It's a fight to bring these kids into the business. And really for the PE firm, they may say otherwise, it's a resource. It's a resource, it's an apprenticeship, it's a testing and battleground because you've been 20 kids in and you train them. And then the kids who work the hardest and the smartest and have to show the most judgment early will slowly work their way through the firm. So you bank on, you're probably an associate for two years, you're a senior associate for two years. And the triangle gets sharper, very sharp, so you get to the top. I don't know what the odds are of making partner, but they're slim. So then you will go to VP for four years, you've got a principal for four years, and then you'll be selected to make partner or you won't be. And you look elsewhere. So that's the typical trajectory in these companies. Where do they go when they fall off that triangle? Where do they go? Well, now they've got more maturity. Typically, they'll go to other firms. They might go to small firms and make partner there or make managing director. There's different titles across different businesses. Or sometimes they're stepping out, they might go into a brand or a strategic and do M&A at the brand or the strategic. They might go into consulting. I think, I mean, look, it's like anything. I think if you are smart and you're determined and you're resilient and you've got good judgment, you can open a lot of doors for yourself in these industries. Maybe you go to McKinsey or Baylor, you go to a consultancy for a while in a holding pattern, and that works until you figure out where you want to go. Maybe you change your arm in BTEC and you go that way. I see a lot of people switching now between finance and big tech. That makes sense because they're all going after the best of the best to bring into these businesses. I'm thinking of some of my listeners who are looking down the barrel of having to work with some of these kids. I call them kids because in many cases, there's a 20-year gap between the owner who has built a successful business based on instinct and a 35-year-old who they think really doesn't know anything about their company, their industry. Yet they're going to be faced with and questioned on their judgment by this 35-year-old little prick in their mind. I wonder what advice you would give a founder. They're looking at two acquisition offers. One is from a private equity group and they're asking you to roll 30% of your equity. Go work with Timmy over here. He'll be your contact here at our PE firm or maybe they've got an ETA buyer, entrepreneurship through acquisition like an individual investor who's offering them 30% less. In their mind, they're saying I could take the private equity deal but I got to sign up and work with Timmy for the next seven years or I could take 30% less and be done. How would you coach an owner who's looking at that decision set? I think you have to figure out the price of the pen. I say that and do a generalise because PE firms, it's not necessarily going to be painful. A lot of the time, it's great to work with but I think, yeah, yeah. I mean, come on, you haven't done it yet. I see a lot of great relationships and great deals happening but I think the relationship is more important than the price because it's like a marriage, it's like a dance. You're going to be working with these people for at least the next five years and yes, if that's not a good marriage, you're going to be very, very unhappy. But aren't the personalities like what you're describing, it's like it's oil and water. I think that's very stereotypical. I think it's a stereotypical view where you say these finance guys who like robots are going to come in and just spill and rip my business apart and just be focused on the financials. To be fair, I think that's the stereotypical view of private equity and I'm not saying that sometimes it might be like that and you're going to get people, of course you get people who might be like that but from my experience, that's not the rule I've seen. I think the operator should look at, do these guys have humility? Are they going to come in and really be good partners for me? And the partner is not just about the funding and the investment. Are they going to be there with me every week when I need their help? And they also understand what value the P-Firm is going to bring because it can't be just the investment because you can get investment from multiple places. So I think you've got to be very clear what this P-Firm has done differently. Have they brought companies similar to mine in the past? What have they done? If they have even better, speak to the founders of those companies, get a full review from people who have worked with this P-Firm already and that's become a norm as well before the founder pulls the trigger. They should absolutely diligence the P-Firm as hard as the P-Firm is diligence them and just get a good feel that okay, these are going to be really good business partners for me. I'm not going to hear from them just once a quarter and they're going to dig deep and interrogate me on financials. These are guys that will actually build a business for the long-term with me and want to build a business beyond the next turn which hopefully I'll still be with again. So I think it's the importance and the diligence on both sides. And if you don't play nicely in the sandbox with other people and you don't want someone to partner with, don't sell the private equity? Probably not. Probably not because you're going to have a partner which will in most cases take majority ownership of your business. If you are doing an amazing job and you're hitting targets, life should be okay because you shouldn't even the P-Firm because that's an ID&P investment, right? You don't need operating. ID&P investment is we buy a company, we don't talk to them for four years and we sell for 3x. That's the perfect P-Firm investment. Of course, life is not like that and 99% of companies are like that. So yes, if you're a founder and you don't want to have a boss, you probably shouldn't sell the P-Firm. Because I think let's get back to digital capabilities because you've got founders listening to this show right now who still use the Yellow Pages. And you're going to walk in there and say, "Hey, let's digitize this funnel. Let's get you on social. Let's figure out your website. Let's figure out your AI strategy. Let's figure out your funnel." And he's going to look at you and say, "No, no, no. Yellow Pages works great." Then you should carry on. Say all the Yellow Pages. I've learned my lesson there as well. If the founder doesn't get it, you're wasting your time. Seriously. You need a founder to say a few things. You need them to say, "I get it. Digital is a thing. I'm on digital. I understand my customs on digital, but I don't understand it and I really need your help. I will support you and we'll get this built together." That's the ideal founder. If the founder says, "Not a priority for me." Or, "I've got enough customers." Or, "I know all my customers already." Or, "With that, I could employ 10 more sales guys instead of building out the marketing." You say, "Fine. How about it? You should do that because they're not going to change." I think the best CEOs and founders that I've worked with are the ones that the best ones get it and say, "I haven't been resourced. Now I'm ready to resource. I completely get this. We absolutely need to be found on Google. We absolutely need this flywheel in place. Come and help me get this build out." Perfect. Next best is, "We need to get this build out. I'm not a digital guy, but I really need your help and I'll support you." That's the next best guy. Then when I think about CEOs, the smartest I've met, if you ask them the question, "What business are you in?" If they say, "I'm in a roofing business," or, "I'm in a HVAC business," or, "I'm in a flooring business," that's good, but the guys who really get this will tell you, "I'm in a sales and marketing business," because they understand this is all about lead generation. Yes, you've got to have a good product. Yes, Ops has got to be good, but it's all about finding that customer, putting them in the funnel, and transacting. It's all about lead generation. The smartest guys in all these industries will say, "I'm in charge of a sales and marketing business, but it's my primary job to build a digital engine to drive leads at scale profitably." Yes, I think of folks like Tommy Mallow who use that model. There's a private equity group that's rolling up law firms in where I live. They don't actually have any lawyers. It's just a lead gen source for where they farm out the people who got it by the bus to real lawyers. They're a sales and marketing company. I wonder, to some extent, some business owners would listen to you describe that ideal business owner who gets digital but needs help executing. They philosophically say, "Yes, I want to dominate digital, but I just don't have the chops to do it. I don't have the internal resources," whatever. I guess some are looking at that and saying, "Why don't I just hire a digital agent? It'll cost me, but I'll retain 100% of my equity." What's the difference between evaluating those two paths? One, dumping a bunch of money into a digital agency that just goes and helps support versus somebody who's a private equity group that's going to buy my company? The difference is, I think, look, if you're a founder, you don't know digital. Hiring digital agencies in minefield, because I think 99% are terrible. I'll tell you why, because they won't take accountability for revenue. At the end of the day, you've hired an agency to make money, not to drive clicks or impressions or conversion. You've hired them to drive revenue, and the typical digital agency will happily spend an hour telling you about vanity metrics. There could be a lot of smoke and mirrors in digital. At the end of the day, on the PE side, I always have one question for them, "How much money are you going to make me? You want $200,000 this year for marketing?" Well, that's good, but it's just an investment like anything else. If I give you $200,000, what are you going to return me? Is it a million? Is it 1.2? Show me how you're going to return that. That's what a good digital agency is, but there are not many like that. They won't take accountability for revenue, and they'll bamboozle you with a thousand vanity metrics. The problem there is, if the CEO is not digital, he has to take what they say as gospel because he can't interrogate them. He can't push back on them and say, "That's BS. No." Because if business is good, a typical digital agency will say, "It's all down to us, and I'll show you the metrics. Why?" If it's bad, oh, it's the macro. It's the macro that's pulling us down right now. Our ops is fine. I've seen this happen. I've seen this movie a lot where a good founder who is not digital will do two things. They'll hire a person who do digital, and that person will probably be junior. It's probably some kid who's done social media, but for the founder who takes the box, remember to say, "I've got a digital person," and then they'll hire an agency, and that takes a box to say, "Well, I've got an agency as well, so I'm a digital business. I've got an agency, and I've got a head of digital." The problem is they don't know what good looks like, and that's a big problem. Hiring is a problem because let's face it, these are great businesses, but they're not sexy or aspirational businesses for the best digital talent. That's another challenge in this. I think one of the benefits of working for a PE firm, they've seen this movie before. They shouldn't know what good digital looks like. There should be a good shepherd in this respect to say, "One, he's a good agency because we've got the 15-hour portfolio companies and they're solid, and they've never failed us." And not alone can save you six to 12 months because picking a bad agency you don't know digital can set you back a great deal. What does good look like? Well, good is an agency that makes you money and can show you how they're making you money. That's the very simple format, good for me. Again, they could spend hours talking about why they're good at driving impressions and clicks and conversion rate and why they're creative is best in class. And that's great, but I expect you to do that. If I'm paying you, it would be an agency. Awesome. I expect you to be good at all that. But at the end of the day, I'm making an investment with you. So just tell me what you're going to return on this investment for me. And a good agency where the Harvey of Confidence will tell me what the return on that investment is going to be. And they'll also put me in a place of scalability because an ideal digital function or agency, your marketing budget should be bottomless. If you get to a ROAS, which is a return on ad spend that is profitable, and let's say your customer acquisition costs, let's say your target is $200, and you are at a good, profitable transaction for you, a CAD $200. I don't see the agency, my marketing budget is bottomless. As long as you can get me CAD $200, open the floodgates, bring that in or bring that business in all day long, and we'll take it. And a good agency will put a plan together to show, okay, here's how I think you're going to scale. Here's how we scale this while I hold CAD and other costs in this business, and I'm going to be a real growth partner for you, and we're going to grow this business together, and we're going to look at the revenue together, and I'm going to understand your business model and your business drivers. I'm not going to be just concerned with digital metrics. You threw out a couple of acronyms there, and I want to make sure my listeners are following along. So you refer to ROAS, return on ad spend, and then CAD customer acquisition cost. What's the difference between those two, and how do you calculate them? They're typical marketing measures. So return on ad spend is, for every dollar I spend on marketing, what's the revenue it returns, which is a very common measure in marketing. So if I spend $1, it returns $7. Your CAD is $7, basically, and then depending on your margin and everything else, you have a target of minimum what my CAD needs to be to make that possible. Your customer acquisition cost is how much does it cost me to land a paying customer. So that can take them through the funnel, and I've paid for the clicks, I've paid for everything, but the minute that customer transacts, and maybe if I'm in a home service business, the value of that transaction is worth $15,000. It's a new roof, or it's new windows in the house. What did I actually pay to get that customer to transact? That's capital. And you're saying that private equity partners, private equity groups, are becoming kind of revops people, revenue operations people. It sounds like you are advocating for and arguing that the best ones, I think you said deploying capabilities as opposed to capital. In the old days, it was about, hey, we're going to deploy some capital and give you some money, and you're going to go away and operate the business and get it to return. Well, what you're saying is they're becoming capability deployers. You have to be. And I think the newer firms with the younger partners get this, and certainly conversations are easier. When you said that it was a digital priority, they'll say, no kidding, of course it is, but it's a digital world. I'm a digital native. Of course, digital is a priority. This is what we need to get built together. So there's just a much better understanding of digital in these kind of newer firms. They're not all new, some of the older firms get it and are turning around. So they understand that. And they've also got the wisdom of crowds. So you think about the firms that are 45 portfolio companies. If they're doing a good job, they're learning from all these portfolio companies. So they're saying, oh, this portfolio companies just crushed it in digital. And this was their agency. Okay, we're going to use those guys again and again and again. So there should be learning all the time and pulling repeatable models. And they should be building a bench of trusted vendors that they go do every time. It just makes it all easier. And when you've got that industry specialization, like you just do garage door companies or home service businesses or vertical SaaS or whatever the niche is, you see that pattern recognition. Yeah, I think that just gets faster and faster. If you just say, look, we're healthcare, that's it. Or we're just SaaS or we're just residential services. Yeah, I think I'm not learning speeds up. Yeah, yeah, yeah. I guess I want to leave you with the final question, which is you've known you've been around this private equity world for a long time. If you had a parting piece of advice for entrepreneurs who may be listening to this, who are thinking of selling to private equity, what would you leave them with as an idea to contemplate? I would say, look, it is a very good exit option. And when I say exit option, I mean, it's a very good form of liquidity. You don't necessarily need to exit the business. You can stand for the next term, the next term. But I think back to the point I made before, you should diligence the PE firm as hard as they're going to diligence you, because it's going to be a marriage for the next four to five years. And if you can't stand your wife after the first three months, it's probably not going to work out. We'll leave it there. Lee McCabe, it's been a pleasure to get to know you both digitally as well as now in person. Where can people follow you? Is LinkedIn the best place? I know you post some of your thoughts there, but where else can people follow you? I think LinkedIn is the best place for me on there. Okay. And so Lee will put Lee's LinkedIn credentials along with links to his firm in the show notes that built the South. Thanks, Lee. Thanks, John. And there you have it for today's episode with John and Lee. If you enjoyed today's podcast, be sure to hit that subscribe button wherever you're listening to today's show. And for show notes, including links to everything referenced in today's episode, be sure to visit Lee's episode page over at Built2Sell.com. Special thanks to Dennis Labatagla for handling today's audio engineering, and thank you to our community of certified value builders who help us bring our message to you. Our advisors are experts in helping you build the value of your company. To get in touch with one or learn how to become an advisor yourself, head over to ValueBuilder.com. I'm Colin Morgan, and I look forward to talking again next week.