Why PE Rollups Fail the People Who Built the Business

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Your team reviews risks instead of retyping them, beta-open September tab. I'm Keith San Patel, and you're listening to M&A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M&A deals. Welcome to M&A Science Podcast. We interview the best M&A practitioners in the world, and pull out what actually works. Over 400 interviews. One framework, by-let-M&A, you don't have time listening over 400 episodes, get the by-let-M&A certification at M&AScience.com, leave the deal, own the outcome. I'm your host, Keith San Patel, Chief Scientist at M&A Science. My guest today is Bill Johnson, founder, chairman, and CEO at the Liberty Company Insurance Brokers, an independently owned insurance brokerage serving commercial, personal, and employee benefits clients across all 50 states. Stepped away for 15 years to produce over 30 Hollywood films, came back in 2018, and since grown the firm to nearly 900 people without a single dollar of P.E. money. Today we're covering building without P.E. capital, the real cost of roll-ups, and people over acquisitions. Bill, how you doing? Bill, thanks for having me. Thanks for taking time from doing deals to have a conversation. Can we kick off a little bit of background? I started this business right out of college, just with a desk and a phone, built it up for a number of years, and then handed over the reins to a friend of mine, and went off into a film business, and produced about 35 movies over about a 15-year period, and then decided to come back to the business toward the end of 2018, so about seven and a half years ago. So you started company in college, how big was it before you took the break to work on films? There's probably about 3 million in revenue, so a small company is just, myself really is the main salesperson and a staff of support people, and maybe had one or two small producers on board at the time, but I was mostly just me driving the sales and the growth of the business. He followed your passion to produce films. I always had a creative itch, and I wanted to do something that felt like it had more of a creative component to it, that time of my life living in LA, that translated into going to the movie business, and that seemed like a fun thing to do, and I didn't know anybody in the business, I didn't know anything about it, but I just jumped in the pool and started splashing around and banging my head against the wall, and eventually I kind of found my footing and started getting some movies made. He'd be like 30 of them, that's quite a two-year-old, when would you go back into the business? My wife and I, we have twins, a boy and a girl, and they were nine in the summer of 2017, when we decided to take a year off and travel the world as a family, and we had a grand adventure and covered a lot of ground, and that just gave me a lot of time to think about I wanted to live my life, ultimately what makes me happy, and as I thought about it more, I just started to feel myself being more interested in returning and putting my day-to-day energy back into the insurance business, which is really, again, governed by what I got clear on what makes me happy, and what makes me happy is primarily two things, number one, people, connection, relationships, and number two, giving service the idea of stepping back into this community of people, which is generally long-term relationships in the insurance business and comparison to a very transitory nature of the film business, stepping back into that business as a servant leader, and with the intention of inspiring a special culture that would really be in service to helping our people be healthier and happier, and provide an entrepreneurial platform and opportunities for people that felt like it would be something that would make me get more satisfaction on my effort. Did you bring anything back with you from the film industry 15 years there is a long time that you brought when you came to a new face or a new look at operating a business? It was hard to make that transition back. I'd really established my personal identity as a film producer and sort of let go of that and to go back into the insurance business and to let go of everything I've learned, all the relationships I've built, I've figured out how to navigate that system and get movies made. Why not? Took a lot of effort and energy and all those relationships and just to leave all that behind and walk away from all that was a difficult decision. What was interesting for me going through that experience was that a lot of what I had learned I was able to bring with me back into the insurance business that made me a better entrepreneur and leader in the insurance business. That wasn't something that I'd really thought about or expected, but number one things like learning how to navigate raising money, the banks and that whole world of finance, nothing more complex than film finance or more difficult, a lot of the things that I learned there I was able to apply as I started to figure out how to raise capital to help this business grow. Then most importantly was just how to navigate relationships, how to deal with people, the film business is notorious for having a lot of big egos and difficult personalities. The skills that I'd learned there about how to build relationships and deal with different types of personalities definitely has served me well coming back and putting my focus back into the insurance business, which is all about people and managing relationships and creating a great environment, a harmonious environment. There are some great points, like the whole reason why you're describing and thinking like this appetite for risk because everything you describe sounds like a big, bad, big risk. What's the M&A story? What did the M&A journey look like when you came back and started building a business, how to get introduced? Why'd you do it? First came back in the business, I just really started focusing on culture and building a foundation that was very healthy and based on a great culture, a great environment working through our mission statement and our core values and defining those things and making it so they were really present in the environment and then starting to attract some talent. Once those pieces were in place and of course that's a never-ending journey, that's a constant tending to that garden, but then it made sense to start to think about doing some M&A. I had done little M&A deals over the years by a little three or four hundred thousand dollar book here and there. I had some experience with it, but I thought it made sense to start to accelerate that and start to do some more of that activity. How many deals do you end up doing, total? Including everything from larger agencies to small little books of business, probably about 50 transactions, something like that. Yeah, that's a good volume. Teaching how to do deals, at least think like the fundamental thing is having a motivated seller. I'm curious just to your experience of identifying like the right seller to work with versus one that's maybe the tires around or just trying to string you along to see how much you'll pay for the business. What's your approach to making sure you're working the right deals? It's all of the above, you can't really control what people's true motivations are. At the end of the day you're looking for people that feel like there's an alignment of values that there's a cultural fit that you could imagine them being a good contributor into the bigger operation and sometimes you get it right and sometimes you get it wrong and one thing that I've come away with in my business journey is you really do, you win some, you lose some and sometimes the ones that win and the ones that lose will surprise you, but ultimately you just do the best you can in terms of due diligence on the numbers in this sort of more hard aspects of the business and then use your gut as much as possible to try to understand the human element and hopefully you get that right more than you get it wrong. About a 50 deals if you're going to give me a vault park of what your win rate would be going up like, I don't know, I'd say 70, 30. Okay, wow, I'm just trying to get a sense of that because I feel like you don't, especially the first deal you work on, you get super excited about it not knowing where the challenge is ahead. Can we talk about some of those challenges? We mentioned a big emphasis on culture and making sure there's people alignment, but a lot of times we're always looking at the numbers and it's like, hey, the worst thing you write off the bat, you want to avoid is overpaying for a business, I guess, how would you look at overpaying versus the right people aligned to create post-close success or there's surprises beyond that post-cruel for deal? - At the end of the day, problems are. Almost always people problems. Somebody's not who they present themselves to be some misrepresentation about the business or the aspects or risks involved with the business were not really properly disclosed and the hard analysis didn't uncover them simple things like, you know, you may do a deal with somebody that you go, oh, this person's 47 years old, they've got a lot of one way ahead of them, they can become a great leader in this company and then it turns out that they don't have any fights. They're just kind of want to sit on what they've got and I'm interested in like growing their book, growing their skill set that might have been the thesis under which you paid a certain multiple like, okay, this is a person that is going to become a leader is going to really build and grow and then they don't so I would put that in the 30% bucket. People who are buying people in this business so much of it. For the most part, yeah, sometimes you might be buying a business that has some markets that you covet or has an MGA platform, let's say or something that's complimentary to the business, but yeah, usually it's just you're buying people in their relationships. There's a strategy identified with ultimately it comes down to the people you can sort of made the point somebody's like near the end of the career they just want to cash out. You're looking at very differently versus somebody that's got another 10 plus years in their career that you could grow with. How do you sort of differentiate that when you look at deals and price it accordingly. You would obviously look at something and say this person 65 and they probably don't have a lot of fire in their belly. This person's 45 they probably do. I've seen it and co the opposite reading humans is probably the most challenging thing that we have in this life. I have a friend who's a face reader, really interesting guy he can look at people's faces and tell you their character, their nature. And I remember when I first met him and I watched him just nail person after person that I knew when I knew their nature and he had just met them. And I remember thinking man, I wish I could have this guy on my side all the time. That's such an incredible ability. I could do a podcast of maybe this like a new form of diligence. We just have to show up do some face readings and send a report out very effective. I like it. Is there anything you do to protect yourself because they you're right like it's unpredictable because it goes a lot of different directions. I was talking my daughter about it was like now early like starting a date and it takes a year to know somebody. So I feel like it's similar with M and A. It just takes a while to learn somebody but here. Heels tend to move a lot quicker. Is there anything I feel like you earn ounces tools to keep people aligned with goals. Are there things like that that you found to help overcome that kind of surprise. Yeah, certainly earn outs. We've done many of our deals that had a retained interest where they maintained a piece of ownership in that business. They were incentivized to grow it and then get some future payout and a bigger entity. You can do some things structurally and then obviously as we touched on you can do the things that are going to help you diligence it both hard diligence and soft diligence. But then I also think that there's some element of just accepting that there's going to be some winners and some losers build in some margin for air. Yeah, and just hope that the winners outpace the losers. What does that mean when I hear it? I'm just like maybe I should just price better and be more conservative when I price these deals, which is tough. We're going to talk a little bit about that because I feel like every sector is just getting more and more competitive or it's just more of like you said. Here's probability that this deal is just not going to work out, but you don't want to factor in the deals going to blow up to zero. Yeah, to your point, you can talk about how you want to price things all alone, but the market determines how things are priced. And right now we live in a world where there's 30 or 40 or 50 P back to public brokers that are chasing after assets and hitting up the price of them. And of course, it only takes two bidders to bid up a price. In general, we would tend to sit out of auctions. I always had a belief. I still do that if you've built a business and you're going to stick around and you care about the people that helped you build the business. Then I say this, where you choose to transact or partner or sell, however that is structured. That's a spiritual and emotional decision. First and foremost, and usually once you know where you want to be from a spiritual and emotional standpoint, you can usually figure out the money. But this whole idea of like bids are due by 5 p.m. on Friday, like that never made sense to me. There's too many other variables involved to just pull it all down and deal some bid price to me. I take you haven't done a lot of deals. You bought an auction. No. Yeah, I'm with you because I feel like you sort of rush a lot of things and considerations. And like you just give example, there are people being aligned to working together. That's hard to compress that timeline and make things happen better because of that. Yeah, and then there's so many variables too. Like normally if people are taking some consideration and equity of the parent of the acquirer, which is normally the case, then there's a whole slew of questions to ask. Around the value of that equity, how it's valued what the capital structure is. Frankly, most sellers are not sophisticated enough to ask those types of questions. But if you look at most of the roll ups out there, they've got these complex capital structures where they might be senior dead and then there's some form of mezzanine dead or maybe it's a blended private credit dead, but it's expensive. And then you've got preferred equity sitting on top of the common equity and the preferred equities got a guaranteed compounding return. And all of that stuff leads to how difficult it's going to be for that common equity actually to become liquid and at what value. And we've seen some of these stories play out where that common equity is sitting around for years and years with no liquidity opportunity or worse. Other liquidity opportunity comes along and all the profits get soaked up by the preferred equity and the common gets crammed down to a fraction of its face value. Yeah, exactly the deal you told me about this before is so the new front insurance remember. Yeah, new front insurance and spend well publicized, but the preferred equity that Goldman had, they took the line share the money and that transaction to Willis and there's been a lot of unhappy common shareholders, which is mostly the producer force that watch the value of their common equity. Get crammed down to a fraction of what they thought it was worth. That's an unfortunate outcome for what's up like that happens because preferred equity structures, you know, they're often 15 plus percent guaranteed return and it's getting compounded. It's not getting paid as they go along if somebody took a hundred million dollars of preferred equity, let's say and had a 15% guaranteed floor return. Then that means after five years they've got to get 200 million dollars and that 200 million dollars sits ahead of the rest of the common equity. So even though it's called equity, it's a different instrument. It's great for the investors, but it's not great for the people that are actually getting up every day and trying to build the business and are holding on to that common equity. And that's why the financial investors won't typically buy common equity. They don't want to be in that position. They want to be in that preferred position. First money out, plus our guarantee to return compounding over time. That's a good business. What's the mechanics of your deals look like? Do you roll over a lot of equity or the companies are buying? Honestly, right now we're doing much M&A. What are you going to talk about that? So when he did do M&A, what did that typically like because they've done 50 deals? Is it sort of evolved to a certain structure that you preferred? Yeah, I mean, a lot of our deals, there would be the majority of it would be cash would say 60% and then there would be like 20% of our equity and then 20% retained interest, which then they could redeem after five or more years. It seemed to be given alignment of interest on both sides. We also did deals for cash only, but yeah, that was probably the most common structure that we had. When that 20% you said like, redeem, does that earn out or is it more of built in as a retention package? It's basically based on however, the business is performed over that time. We would always want to help people grow the business and then it would be based on the size of the business at that time times the remaining ownership. And it would be at their timing to that typical deal that you see was 75 cash 25 equity in a three or earn out and then at the end of three years that person's an employee, they have no equity interest in the business anymore. That didn't feel very entrepreneurial to me. I always wanted to have a situation where that entrepreneur could keep going and keep building value for themselves and then cash out on their timing in most cases. Like some people might want to go for another five years. Some people might want to go for another 20. If they want to keep going and keep building value and we want to be here to support that and have a structure and a mechanism that supports that. Is there liquidity for them if they get to the point and they have some security in the company that they want to realize it with that retained ownership. These nine all cases, but typically they can come to us and say we want to sell it back to the company now and the company will buy it. How do you become the best MNA practitioner? You'll learn from the best. That's it. That's the whole secret. It's what we've done at MNA science from day one. 400 conversations with the best operators alive. You've heard them on the show. So we asked a better question. What if we turned that into a product? So we did two certifications. The first MNA fundamentals is for people new to the game. Or maybe you just. just close your first deal and you felt every gap. This is how you close them. The second is Byerlet M&A. Our flagship, we took the best of 400 deals and built them into one framework for the buy side. Every stage of the deal covered. We built both with PhD learning scientists. The quality has passed anything we'd make in-house and you'll feel it in the first 10 minutes. You've already listened to the best. Now, go train like them, M-A-Science.com. [MUSIC] Sounds like the biggest surprise on a deal comes down to the character of the owner. And I'm just curious if you had a story you want to share about the character of the owner. Surprise you either in a good or bad way after close. We've had some wonderful people join the company and just really positive. Again, this business is a culture playing. It's all about the environment and it's not something that management or leadership can install. We can inspire it. We can try to help define it. But ultimately, everybody here is coming together as a community, as an organism to create the culture that we have and the environment that we have. And so I always like to describe our culture as a culture of appreciation and good feelings but also of high performance. We've had people come into the company and let's say that we've acquired who've just brought great energy into the company. They've been great leaders. They've been great partners. They're generous. I always say partners are generous with one another and fair with one another. And then we've had some other people that have come in and had more difficult personalities. And in some extreme cases, they've been abusive to staff. And we've usually figured out a way to part ways with those kind of people. Whether it be maybe unwinding the transaction or figuring out some way that we can just get to having a peace in harmony. - You had a wind of transaction that can imagine things being more painful but that's for emanating, that's gotta be tough. - If somebody's not enjoying the environment if they can't figure out how to be happy or get along with the rest of the team and whether they're being abusive or whatever the case may be, it's like we can't have that. We can't have that in a culture if we want to have a great culture. This isn't feeling good apparently for either side. So let's figure out how we go our separate ways. - What point did you decide acquisitions weren't worth the risk anymore? - The hardest thing to do in this business is to grow organically. It's relatively easy to go out and take on a bunch of PE money or take on a bunch of debt and go out and buy up a bunch of assets. The hard part is integrating them and then getting them to grow organically. I just realized for myself, I just enjoy getting up every day and focusing on how to grow the business organically and make it better and make it a well-oiled machine and develop talent and recruit talent and create a great environment. I just enjoy all those things a lot more than taking on a bunch of debt to acquire assets and then hoping it doesn't fall out the pectoral and worrying about my leverage or having to take on investor money that is gonna have terms that I don't think are ultimately gonna be good for the business in the long term. We've been able to grow in seven and a half years from 11 million to 250 million in revenue without taking on any equity. So we've had an incredible growth rate. That's been largely driven by our organic growth and we've been able to keep our leverage in the four-time range, which is good. And I'm happy to keep it that way. I'm happy to just keep growing organically, reducing leverage, having money for redemption's equity redemptions, which we did a big one last year last October and we expect to do others in the future here. That just seems like a way to have a healthier environment ultimately in the business, to me. - You like working hard? And there's the quality of the business that you're building when you do it organically as well. - Yeah, there's no issues with brand migration. There's no issues with people having different processes. So you're here to have uniformity of processes, uniformity of collateral, how we do what we do. It's very satisfying to bring talent into an environment that we feel like we've created something special not only culturally, which is most important, but also how we operate, how we provide services to our clients and to our producers to help them maintain and get new clients. That makes me happy. - When you do M&A, you're still trying to do that as well. You just don't get that same level of focus that you just described. - I'm not saying we're never gonna do M&A again. We've done a couple of small deals this year, but it's like your senior leadership only has so much bandwidth. There's only so much attention to go around. The question is, are you putting most of that attention on raising equity, rolling up assets, integrating them and all those challenges? Or are you getting up every day, figuring out how to drive a better sales culture, how to develop talent that you have and develop new talent and attract new talent and streamline your processes and procedures and systems. It is tough to boil the ocean. It is tough to do everything. - Can we talk a little bit about the economics of the way you grew with acquisitions? 'Cause you didn't have a big private equity sponsor essentially did it with your own internal sort of cash resource management. And you mentioned Forex Leverd. Can we impact that a little bit of, how do you think through your business economics to make M&A doable without getting the whole house? It's a great to see it. And I'm always curious about it too, is I build a software company up. How strong should the balance sheet be before you really start looking at acquisitions as another growth lever? And how do you look at those economics doing it off an organic balance sheet without raising money? - Again, I just think it comes down to leverage. It's a great governor. If we want to keep leverage in the fours, then we can go out and pay 10x cash for a bunch of assets unless we're growing organically at an incredible rate. Now this year we're up so far through July. We're up 25% top line revenue. And most of that is organic. So we're having incredible organic growth right now, which is really just based on all the talent that's coming into the company. A lot of that talent does take time to ramp up. There's carrying costs involved in that, which impact your obviously your EBITDA and your leverage. But once you get through that ramp up period, then you're not carrying any additional debt. I've always just thought about it as wanting to have a healthy balance of organic and organic growth. And that would put us in a position to let that leverage governor be in the comfort zone. - What do capital sources look like for you? 'Cause you're not an asset heavy company. I feel like you're not the most favored type of business to lead to. - Actually, that's not true. Lenders love this business. I didn't used to be that way. I remember years ago talking to banks and they were like, oh yeah, we can't lend to insurance brokers. This is probably, I don't know, more than 15 years ago. But that has changed. And now they view the recurring revenue and the stickiness of our business and the higher attention rates is very lendable assets. We've always had a senior credit facility until last year when we did a term loan B. That was a big step for us last year to close that term loan B. And then we have a revolver as well. But our capital stack is very simple. We just have simple common equity and then a term loan B and a revolver. What's a term loan B? - Term loan B isn't a debt instrument. It's basically investors that invest into the term loan B's and they can sell in and out of their position. There's sort of a marketplace around that. So it's almost public debt, if you will, as opposed to going public and having public equity. But we have to do a quarterly call with all the investors in the term loan B syndicate. But it's a seven year guarantee of that money that we have. And it's an efficient form of capital. - You share what type of range of interest you have to think on those type of vehicle and like how big of a company do you need to be this? So it went up. - You need to be the low end of being able to qualify being the term loan B is probably about 80 million or so of EBITDA. The market's gotten a little tougher now than it was last October when we closed this deal. Just due to the war and other factors pricing that information is publicly available as well. It depends. You have to get rated by S&P and Moody's, which we did depending on your rating will depend on what kind of spread you pay. And I see maybe generally that the spread range might go from like so for plus two to so for plus 450 depending on the size of the company, the credit risk and other factors and what kind of rating S&P and Moody's give. And then there's usually like an OID which is like a fee off the top and that from what I typically see ranges anywhere from like nothing to 1% of the loan. - Okay, let's go back some decades back when you worked as big. What did that look like? Did you just work with the local bank relationships or whether I can imagine there's not this big of like private credit market that there is right now? - I think our first borrowings came from insure bank. They gave us like, I wanna say like a $7 million line of credit or something like that. And then we upsized it and we ended up doing a deal that was led by Bank of Montreal BMO and then they did a great job for us. And we had that for a few years. We expanded it a couple of times and then JP Morgan came in and they took over the lead position on our credit facility and put together a syndicate of top tier banks. We had that in place for a number of years And that's what we're doing. the term won't be last year. Many of those banks stayed in our revolver. They helped us raise the term won't be money and then they participated in our revolver. - Pretty cool. It's pretty interesting to see how there's a life cycle without the debt evolves. When you go back to mechanics of the deal, you sort of now kind of have this view of, here's your organic growth. Here's an organic growth you can attribute. And then you have, how much you're leveraged. You know, you sort of use that rule of thumb of round four X that you want to stay within there. And then when you look at these targets, there's about 60% cash. And here is, does that help offset it too? Like having them take the 20% as an equity and then you got the other 20% redeemed. Is that part of that equation? Is that more of just a tool for alignment, both? - Yeah, that's part of the equation. Of course, you're also building future obligations for yourself. If you do a deal at 10X and you pay 6X and cash, there's going to be a future two X on some number of future, which is probably going to be bigger on the retained entrance. And then there's going to be another equity obligation coming down the pike as well. You have to keep in mind that, even though you're laying on a certain amount of cash today, there's going to be that future obligation coming, whereas with organic growth, it's less burdensome, but harder to come by, harder to achieve. - Yeah, better work harder for you. How is this market place evolving? You've been in the space for decades. You mentioned there's 30, 40 of these private equity platforms that are running the same rollup label right now. How's it going to pan out? What happens with the music stuff? - Yeah, it's going to be interesting. A lot of those companies will probably either go public or sell to a public. Some of them will merge. Some of them will be replaced by other PE hackers. Some of those will be like the new front story we talked about where there'll be some investor with preferred position that's going to do very well and a bunch of disappointed people holding common equity. But a lot of those stories are going to play out over the next few years because most of these funds, they have a five year life cycle typically that there are a number of years into those cycles for many of those firms. In some cases, they just refinance out and they just keep going, especially with some of the minority ones, but you never know how that's going to play out. - That's true. I'm just curious because I feel every sector you look at, it's just so many rollups. Wonder if there's an end in sight at all. But PE still loves the business, even though it's maybe not as easy as it was 10, 15 years ago, they've done very well with it. And the fundamentals of the business are still very attractive, the recurring revenue, the ability to grow it, the high margins, or very strong margins. The benefits that can come with scale from what I see, there's still a lot of demand out there for PE in this space. - Can you maybe walk me through, I guess one of the things we look at building the throw up, we talked so much about culture, it's essentially building culture at scale. I'm curious between the path you took, which didn't have private equity pressure, versus if you would have had the private equity pressure deserve a view on how that would've been different. - There's a million variables there. And for me, when you use that word pressure, I don't generally think pressure is a good thing for an organization. Pressure creates stress, which degrades the environment, the cultural environment. And when we talk to people, we observe that, there are a lot of dysfunctional cultures out there in the industry, there are a lot of places that over leverage themselves and/or have PE sponsors that are just staring at spreadsheets and trying to figure out how to grind out a little more margin. And whatever the human cost may be, is considered a secondary or inconsequential. For me, I've just had a very different thought process around it of wanting to create an environment that has as little stress as possible, that has a lot of harmony that has passion. So people are working hard and growing because they love what they do, because they have passion about their work. To me, that's very healthy. But when you start talking about putting pressure on an organization in order to achieve a certain financial result by a certain date in order to effectuate a liquidity event for some PE sponsors, that seems to me like a misalignment of interest. - It is different, actually, think about a friend who was in a senior role at a PE back role up. That was the biggest frustration that he had a lot of pressure to cut costs and just meet certain KPIs for the sake of meeting their little metric KPIs that they try to target. And they would just walk me through how this is like a dumb decision that's going to end up getting reversed within a year later. The way you operate, you don't have that same pressure at all. It's less of that pressure and more of growing a healthy company and what's best for you. - Yeah, just making decisions based on the long term benefit of the company, yeah. I see it in all sorts of ways. Over the years, we've looked at different acquisition opportunities and you see these pro-formas where they cut down all these expenses and cut down the commissions to the owners and move them down to, like, you got some owner who's managing a $2 million book who should be making 600 grand a year and they put in the pro-forma that he's just going on a straight salary for 150 grand a year and that 450 difference just drops to the bottom line and then they're like, okay, give me a 10 or 11 multiple on that $450,000 and do that three times with the three principles and we see these deals and they're all of a sudden showing you a business that's got a 60% margin and they want to get a 10, 11, 12 multiple on a 60% margin which you know is not sustainable and you know that you can't replace that person managing not $2 million book in this example for 150 grand. You know, you're going to have to spend 100 grand to get a proper replacement if that person were to leave and that's going to degrade your margin but I see different PE firms sign up for that all day long because in their mind, they're just buying EBITDA and then they're just going to flip it to the next guy because their recap is in 18 months and they won't come home to roost, it'll be the next guy's problem. We would always just bulk at that and say, it's got to make sense for the long term and ultimately it's like, are you creating a partnership? Are you acquiring somebody that's going to come in your organization and be there for a while and this is a partnership and as partners, we're gonna try to grow this business together or are you just trying to get as much money out of this as you can and tweak the performance as much as you can maximize that and go right off into the sunset and let it be somebody else's problem down the road. - Yeah, so it's running a business for the five-year timeline or running it for the long run. Is it different when I'm thinking about when you buy business and there's always the fabled integration, we make value, lose value, is your approach different? So now a lot of these rollups get a lot more scrutiny around how well they actually integrate it because you just can't call revenue together and sell it now by actually paying a lot more attention to it. How is your view on when it comes executing the integration? - Our view changed when we first started ramping up our M&A activity and this was like beginning in 2021 to 22 and we were just saying, "Hey, don't worry, we're gonna let's keep doing your thing, "keep your brand," and then we just grew too quickly and we got out of our skis, we didn't have the infrastructure to support that kind of revenue, we didn't have the quality of management leadership, that was able to operate that way and with that kind of revenue. At the beginning of 2023, we just hit the pause button on the M&A and we had a big pipeline at that time but we just realized that we needed to stop and really focus on building the foundation, building out our processes and systems and procedures, upgrading our leadership team, and then also integrating brand migrating and working toward having just one enterprise that operated with consistency and shared procedures and systems, that's a big job and I'm glad that we stopped when we did, which was we were at about 150 million of revenue at that time when we hit the pause button and I'm glad that we had gotten up to 700 or 800 million and then our billion or something crazy and then decided to do that because man, what a massive a job and exercise that would be to try to tie all that together. - You learned it the hard way but you learned it early enough the hard way and often, I'm wondering is there a way that you don't have to learn the hard way, I feel like everybody goes through this, they get to this point when it's just either catch early enough where you got a lot of pain and endure. - It's interesting also 'cause it does tie back to what you were talking about of how do you get that initial scale without taking on equity money. While you're acquiring this stuff, you're also building an infrastructure our accounting department went from four people to 25 or 30 and building out HR teams and IT teams and operations teams and carrier relationship management and so forth and so on and proper leadership and the money it costs to bring in the level of leadership that you need to some degree and this was a necessarily intentional but the way that we did it, it did allow us to fund the infrastructure that we needed to build without having to take in the PE money 'cause we had enough revenue and EBITDA to keep our leveraged governor under control and enough money that we could apply against the corporate overhead to pay for the resources that we needed which is if we had done that slower and more incrementally we may not have been able to or maybe it would have taken us many more years to do it and a slower incremental pace. It's like this integration is it's like an ongoing and investment. And it's not just integration. Essentially, it's part of the organic investment that you're making just as well. Yeah, integration infrastructure, all the people that do that, the whole process around that. We had to really upgrade our process and go from a very sort of unsystematized integration process that was very slow into something that was much more proactive where before the acquisition would close leaders from each department and functional area of the company would come in, meet with the management of the company being acquired, get their arms around what was happening, how it was operating, and then build a roadmap and a plan to work to get that integrated as quickly as possible, ideally within 60 to 90 days. You got any tips or tricks to make the deal successful? I'm looking to my first deal when I try to have to screw up some important things. I try to find somebody like that you think will be a good partner and I always say one of our core values is fairness and that's just because it's hard to cover every contingency in agreement and when there's just going to be situations that arise that are not going to be clearly fleshed out in the agreement and that are going to require two human beings to sit across the table with one another and just be fair with one another and hopefully see to eye to eye and what fairness is, if you can find that then everything else will work itself out pretty easily. It's like that working cadence, which I feel like you figure out pretty early in the deal if I have had it before, this person you'd pay in the ass and this is going to be too hard of a deal to actually do. Yeah, red flags can come up during the deal process and it's good to pay attention and listen to those and not be afraid to pull the plug even if you've spent a lot of time in energy getting to the point of getting close to closing, but if you start to see certain behaviors that you feel like they're not going to be a good fit in your culture, save yourself to trouble and just duck out before you close. Yeah, really the better, anything like after you sign L-O-I because I feel like that L-O-I to close is always a big race to get the deal done, but I feel like that's also where you can easily trip over things or miss things that are pretty important. It's definitely time to hopefully allow someone's true character nature to reveal itself. I always say that in general, when you get knocked on your button life or when things don't go your way, one of the blessings of that is it's a great opportunity to look around the landscape and have character be revealed and see who people really are, the people around you and there'll be some people that will just reach down and offer a hand to help you up. There'll be other people that will just stand there and look at you and put their arms folded and walk away and everything in between, but it's always great when you can have an opportunity for a true character to be revealed. Maybe you'll simulate that. How do you create this scenario to test true character? Yeah, that's a great one. I'm sure there's been some ways to do that. It's going to introduce some element. Usually there's something in diligence you find to argue about. I guess we're getting close on time here, but I had a question. I asked Bill for his thoughts on how he sees liberty offer to prospective acquisition targets compared with the serial insurance agency rollups, which is Acro sure hub and the rest. I believe it. Liberty's culture, treatment, producer, staff clients and buyers are significantly greater. How do you sell against the bigger publicly traded rollups out there? I feel like we touched a lot of these themes for the interview, but if you want to summarize it. Like I said, I just think that this is about people to people business. I always say if you want to get a sense of our organization, talk to our people, I'm a big believer in the bird to feather theory of life, like energy, attracts, like energy. We've had a lot of people say that they had their best days when they were working in a nicer regional firm that had resources, but it still felt like a family. I've really tried to work to maintain that feeling here at Liberty where even though we're a national firm, I think a lot because of our ownership structure, it does still feel like a family. It does feel more personal. That has value to a lot of people. People may be more and more are seeing the fallacy of scale and just being rolled up and it's like I say, the P strategy is rollup, a bunch of assets grind out margin and then flip it to the next guy. That's the strategy. It turns out human beings don't like to be rolled up ground and flipped. They like to be treated fairly. They like to be in a great environment that feels good where they can enjoy their work and this is what we dedicate our lives to, this work and what we spend the majority of our time. Money is important, but equally and in my view, more important is the quality of your experience, the day-to-day working, the people you're working with, the environment of culture. When it comes to those things, we've created something unique and special and that's how we differentiate ourselves. For people that's important to, they recognize that. It's hard for sellers to find that and give that example of a better process, how do you identify with those, but it's extremely important. For I let you go Bill, I got to ask you, what's the craziest thing you see in M&A? The craziest thing in M&A, we had one example where there was just a gross misrepresentation and lack of disclosure on something that was significant and that led to a messy situation. Again, people, character, integrity, and it's not always easy to identify when you're first meeting someone, characters revealed through action. That's why I learned through the movie business. Characters not revealed through dialogue, it's revealed through action. It takes a while a lot of times to be around people before characters revealed. Overall, we've won more than we've lost and we've continued to trim that bonsai tree. I like to think about culture as a bonsai tree and it requires a lot of meticulous trimming and pruning, but if you put in that work and pay that attention, something beautiful emerges, we've been able to get to that place because of the quality of the people that have chosen to be in this organization. I'm the true character people. I'm looking forward to meeting the face reader, who that's you mentioned, and then working on simulating some scenarios to help identify people as true characters. Bill, thank you so much for taking the time to have this conversation. I learned a lot, you've helped me become a better M&A scientist. Nice chatting with you and I wish you well with the podcast. Thank you. Those of you that listened through, thank you so much, my fellow M&A scientists. Feel free to connect with me on LinkedIn. I love hearing feedback. Let me know what you think of this podcast. Let me know if you have other topic ideas that haven't covered suggestions. I'm open to it. Criticism. I'll take it. I'm trying to get better at this. Till next time, here's to the deal. Thank you for taking the time to explore the world of M&A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple podcasts. We'd love to hear from you. If you need help standing up in M&A function or optimizing one that you already have, we're here to help. And if we can help you, we probably know someone that can get in reach out to me by email if you sign [email protected]. Or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit MAScience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's MAScience.com. Here's to the deal. 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