Mark Sinatra welcome back to acquiring minds Thank You Will Smith appreciate it Mark you're a business buyer and now a two-time acquiring minds guest you were an early guest back in late 2021. so you have Acquired and grown and exited businesses you are an investor in other search deals so broad experience in acquisition entrepreneurship and your day job is running Aspen HR Aspen HR is an outsourced HR provider so you have a lot of front lines experience with the people side of things and as comes up time and again on this podcast small business pivots around this topic people so we're going to dive into some specifics uh and your expertise around some of these these HR and people questions in small business for acquisition entrepreneurs but first Mark refresh our memory a little bit give us a little bit more of a bio than I just did on you please yeah yeah thank you all um like you said you know I pursued a traditional funded search uh shortly after getting out of business school um for many of the folks listening to this today the big appeal was to run a company without really taking the the risk or without having the idea that I was Uber passionate about to to have started one at the time and I felt like the search fund model was the most direct path for me to get into that ceoc so pursued that path I searched for about a year and a half and this is during the I would say 2007 to halfway through 2008 time period and then was lucky enough to Cobble together a transaction to acquire a company called staff one HR which was a provider of outsourced HR Services otherwise known as a peo it's a small medium-sized companies uh the company was based about two hours North here in the Dallas area was really good representation of I would say a lifestyle business where you know the owner kind of built it up was looking to retire no succession plan no liquidity plan so on paper had a lot of the attributes that you know any search fund operator would want to see in a in an acquisition I will say and we'll go into this a little bit later um there were certainly some attributes of the business that were significantly I think under professionalized um that kind of led to you know me spending a lot of time the first I would say three years or so um you know really kind of fixing and trying to professionalize and trying to kind of gear it up to be more of a of a growth company uh but that said you know we we actually got it to a point I would say like three years into the deal where I felt okay now we can really start to grow organically pursued a path of mostly organic growth um for for really the the six year period from really 2011 to 2017 um and on top of that made made uh three small add-on Acquisitions towards the end of the whole period which we'll get to later as well kind of package everything up together and we sold it to our largest privately held competitor in 2017. that was backed by a couple large private Equity firms that were doing a roll-up of the industry we were the second to last acquisition that they did uh prior to them about 12 months after they bought us they then uh in turn package everything up and sold everything to a public company uh in our space and so I left about six months after that acquisition and then like you said started kind of uh dabbling in investing in search funds and currently do that now with my friend and business partner Matt Zucker who I've known for you know a long time ever since the early days of Wharton and so we invest in search fund deals out of the ETA Equity uh fund uh that that we run so great thank you for that Mark and so the and then Aspen HR how did you get involved in this business got involved in Aspen HR do some mutual industry connections and I did make a an investment in it but it was it was started uh about five years ago and I got introduced um really in the in the very early Innings of the business but it was it was after they had they had started and um you know they were looking to really you know kind of grow scale professionalize the business so in some ways actually some very similar elements to um you know kind of the search fund thesis and um you know we pursued a path really since then of significant or organic growth to the point where you know we were recognized on the Inc 5000 list last year's the third fastest growing peo in the country this year will probably be up on a Top Line basis 50 and really I think what's leading to that is just you know our White Glove service model and our Keen focus on on our sandbox which is really serving you know the investment management segment so we serve a lot of like VC funds private Equity Funds uh and their portfolio companies and I think uh part of you know our partnership as well like we're starting to really kind of dive in more into actually serving you know search fund operators as well great there will be a link to your first interview so people can get your story in full there um so we're gonna move on from that and let's dive into some of the themes that we uh decided we'd talk about today first diligencing the people aspect of an acquisition so this is something that comes up a lot you know looking for key men and women risk retain making sure that that they stay that employees in general stay pro-forming people coming to you on day one for raises I mean there's so so much of this is is about the team that you're about to inherit and Lead what do you want to let Searchers out there know about how to diligence from an HR perspective yeah I mean absolutely I mean I think it's one of those underrated aspects of of diligence that you know when you think about due diligence in a traditional framework you would think about you know Q of E legal if it's a tech deal you do your Tech diligence if it's a health care deal you do your health care diligence but I feel like the HR component really gets gets overlooked and if I had to kind of boil it down into I would say you know three areas um you know one would be HR compliance you know the reality is a lot of these search fund uh companies have never ever sold before right um you know HR is very very rarely will they have a dedicated you know HR professional or HR manager that's an in-house employee managing that function it's usually a function that's shared um really among like you know could be the the owner the controller maybe an office manager um so you know I'll typically see a lot of improvement just to professionalize you know what the company is doing from nhr compliance perspective ensuring that you know there's uh you know proper classifications of employees between you know full-time part-time 1099 W-2 very common issues that pop up that sometimes aren't really caught in the traditional I would say workflows of of due diligence that we'll see um you know the second area would be like you said you know key employee transition risk so you know really understanding you know to kind of take it away like you know besides the seller and the owner but you know who are those other folks that at the end of the day like really like Drive the business right and like not just looking at like an org chart and like inferring from that because that often is not reflective of of reality in terms of you know who do those like key customers really rely on you know for questions and answers on a on a regular basis and you know how is that person you know compensated relative to the market what's their tenure you know are they engaged are they happy what's their tie to the owner if the owner's Gonna Leave You know will that key employee leave as well are they going to stay to the extent and this is the hardest part of due diligence you know to the extent that the the Searcher you know or the buyer can build start to build and form you know that trusted relationship during the due diligence and deal process the better it's going to serve them in the future in in terms of first like understanding well you know if this key employee going to stay on or not and and hopefully um you know they they will stay on and and you get a good sense of you know what motivates them what drives them you know what do they like about uh you know the current company what don't they like what do they want to see improved really asking a lot of a lot of questions to you know seek their input early on is I think you know extremely extremely critical so I would kind of classify that second bucket again as um you know transitional HR risk um that is is really critical and I think it's really it doesn't matter if the company is a Service Company a software company Healthcare company or even a manufacturing company right all of these companies at the end of the day you know have key employees at the seller and owner you know rely on for you know to drive you know the day-to-day you know operational part of the business and I would say the third part is is really you know assessing kind of going forward um you know are there do you have the right team and in the right seats doing the right thing the right way right so more like the Strategic HR element and I don't know if you've had folks on this podcast before talk about different business growth Frameworks such as you know EOS entrepreneurial operating system or gazelles you know through the Vern harness method but the bottom line is and this is true from my experience um it is imperative that you have the key roles in the company at all levels but particularly the I would say mid-level managers and then your executive team filled with people who are obviously technically competent for the role but also culturally competent as well and it's a very strong culture thing if you can firmly kind of check those two boxes then it's going to make your job a heck of a lot easier as the CEO to run and grow that company and to have time to focus on the right things to drive value for the company I found from my experience and this will dovetail into a topic we'll talk about a little later that you know it took me honestly too long I would say it took me a good like three years to really kind of figure out the right formula and to have those right seats filled with the right people but I can tell you once I was able to do that that enabled me then to then focus on you know those add-on Acquisitions to focus on growth initiatives and all the fun stuff that really drive you know significant value in the company so kind of take it a step back I think um again those are the three areas of what I would call HR due diligence that are extremely critical to evaluate in a potential transaction and oftentimes it you're not as a as a buyer and as a Searcher you're not going to be able to do really any diver Deep dive into those areas until you know you've probably made some progress in the transaction because the owner is likely going to be pretty guarded initially you know certainly post Loi um even in the early stages of providing you access to right to you know some of their you know key leaders and and key employees but what I found is um you know you you as as long as you continue to do what you say you're going to do in the transaction which builds trust right and as you continue to build that trust with that seller and you continue to make progress through different key milestones and gating items in the transaction the greater your probability is that you're going to be able to you know get good quality Face Time group FaceTime even better one-to-one face time with those key employees and that is going to be really really key again to giving you the confidence that okay you know these key new hires or I'm sorry these key employers are going to stay on you know post position or conversely maybe they're not but either way you're going to have Clarity in whatever Direction that's going to go in I want to um hit one of the the next themes which is another thing that comes up of course in due diligence is customer concentration well I shouldn't say customer concentration I should say being aware of your biggest customer that big customer might or might not represent too much concentration but even if it's not even if you've got a nice distribution of of your customers you're still going to be hyper aware of who your biggest ones are you have lost uh your biggest customer this is something that you've you've experienced tell us that story um and what how you how you dealt with it yeah yeah I mean it's definitely something that um you know I'll I'll see quite often uh when we're you know evaluating investing in search fund deals and that's partly just due to like the you know kind of you know fairly relatively speaking small nature of the deals right you know companies with five to twenty million Revenue um so you know it can be certainly solved for sometimes in terms of how you structure their transaction I think in my case when when you know diligencing the deal the largest customer was actually only about 10 to 11 of total revenue which you know still is like higher than what you would want to see but nothing that was I would say alarming per se but a couple things happened subsequent to close um one thing that happened was uh really a macro headwind of just the a kind of a deep recession and so um you know that really hindered our ability to have as much organic growth as we expected so didn't sell as much as we we thought and then coupled with current clients you know we had some clients that were just frankly just went out of business or we had some clients that were reducing head count which reduced their revenue um but at the same time our largest client actually during the recession grew very quickly I was a company in the property management space and um you know they were just well capitalized and they really took advantage of a significant growth opportunity to acquire new properties to manage during the recession and so if you just kind of look at it mathematically like the numerator grew a lot while the denominator kind of reduced and so I kind of found myself you know a couple years post acquisition with now my largest client not they weren't 10 but lo and behold there were actually 30 percent you know of the business and it presented us with like a significant risk you know from from that perspective of course the fact that they grew was really nice but it's a double-edged sword right because the more they grew the more the more risk there was and kind of looking back at it You know despite the fact that they that they grew so much and had count at the end of the day like at their core um you know they're very I would say you know kind of relationship based uh folks you know the the decision makers and and the influencers you know at that organization and unfortunately for us you know we had a kind of a long-term long-tenured employee who was really kind of at that retirement age and um you know unfortunately like after like I would say the two-year period really wanted to you know retire permanently you know kind of forever and it it kind of gave us a it left a void in terms of okay well we have to really do a good job of ensuring that the replacement for this individual would be equal to or just or even better right uh in all aspects and the short answer is that I just did not get the replacement higher correct at all um it was just it was really kind of a um I would say a misfire on my end where I think I had uh valued overvalued perhaps um you know this individuals I would say um you know kind of HR competency and skill set came more from a traditional perhaps corporate background and not really a small medium-sized company background and so the relationship building component um wasn't as as high as um you know what the um other person had that that retired and so as a result um you know the the largest client just was really not comfortable at all you know with the with the person who you know we had hired to to replace um I will say and I may have talked about this on the last podcast and so maybe slightly redundant but real quick I mean that really that whole experience you know kind of opened up my eyes to leveraging you know the use of Personality profiling tools to increase hiring Effectiveness improve hiring accuracy and and um you know I will say like um I don't think after that experience I I really don't believe I had um a um a misfire to that extent but it really did um you know I think have a negative impact on this client to the point where I remember walking into you know the building or building one day and um got in the elevator and you know saw this FedEx guy with an envelope and um going to my floor and I'm like oh geez like I just had a really sinking feeling in my stomach that it was going to be some sort of a cancellation letter and it was that's what it turned out turned out to be and and that that really you know kind of set the stage for us to really you know restructure the business and and really kind of like shown a you know kind of a magnifying glass of just making sure that we really understand you know um you know the type of of employee and executive you know that would be value-add you know to us and to our clients going forward so to be clear this lar this customer of yours who hadn't represented um too big a percentage initially had grown into 30 of your Revenue the person who is servicing on your team the person on your team who is servicing that client retired and your replacement that you chose it was just a terrible fit yeah I mean it was my I mean definitely my mistakes I mean I want to put it on that individual like solely and and there there were you know a couple other challenges as well which you know as what we have found as as as companies tend to get extremely large right I mean like you know thousand plus employees the kind of the the way that you service them you know in the earlier days changes right um and needs to change and I don't think we you know we really adapted quickly enough to that but that's a good that's a good summary on your end though yeah and so what what to do differently was what what you took away from that experience which is personality test I mean you became much more data-driven analytical scientific even in terms of key hires is that was that kind of the the big list yeah that's definitely one of the the biggest takeaways um I would also add as well though that um we went to more I would say a decentralized approach to managing the client clients in general right and and and so you know there's there's always like a double that's sort of having do you have a single point of contact to make it you know kind of easy seamless you know for the client or or do you have you know kind of a team of people and we went to more the latter because we felt that um you know it it you know sticking with like the single point of contact model would have presented us with a similar risk where in the future of being you know kind of too concentrated in you know of you know risk in that the quality of that relationship between the signal point at contact and the client and so kind of decentralizing that among you know I would say like three individuals on a team or pod if you will was something that we went to afterwards that I think really helped um you know mitigate that key person risk going forward great mark thank you for that um story The one of the things that you I think you mentioned but I I know from your your your experience over those nine years was that you there was a lot of organic growth um but you did do a couple of add-on Acquisitions and you also see into into search deals um of other acquisition entrepreneurs wanting to buy and then acquire more and that certainly is something that you hear about a lot uh here on acquiring minds people doing that and it's one of the exciting kind of one of the exciting prospects it's like once you've done your first deal you've learned how to do a deal um if you bought kind of a good platform then maybe these second and third deals are even easier you're now part of the industry so you're not some Outsider knocking on doors saying hey can I buy your business I mean so you know it should only get easier now that's probably naive and and a lot of people have said that their whole plan is to you know buy the first business then the second then the third then the fourth and they got in there and realized how unrealistic that that unrealistic that was however it's still a Playbook it's still certainly done what are your thoughts on how how Searchers that you talk to should think about add-on Acquisitions and how you'd have in your own business I mean I think in general inorganic growth add-on Acquisitions can be a fantastic lever to to grow and to you know increase Enterprise Value um particularly in Industries uh that are fragmented Industries where the barriers to entry maybe I would say like low to moderate but the barriers to scale are high and so as a result you've had a lot of companies that kind of plateau you know at that you know anywhere from 1 to 20 million in revenue and they just they either can't get beyond that or they don't want to right because oftentimes you know an entrepreneur can actually be the most risk-averse person when you know they get their company cash flowing to a really sustainable you know predictable level right and so it then it starts to kind of kind of plateau and those can be really interesting uh and very creative acquisition opportunities you know for a search fund um you know operator I think the way that I approach it so I did three add-on acquisitions uh two of them were extremely creative at a weighted average you know actually they all um were creative but I would say two were very successful one was was I would say like average um but you know across all three the weighted average ebitda multiple was actually like 2.7 now that was um synergized that was post post synergies um but you know we sold for double digitally but done multiple so you can see like you know there's significant Arbitrage there um but it was a strategy I didn't really pursue until I mean I would say like at least five or six years you know of running the business I wanted to make sure that we had a strong Foundation First where we could operationally do a great job with integration and absorbing those add-on Acquisitions and that we were showing some you know sustainable consistent double-digit organic growth and so once we were able to check those boxes was when I felt comfortable you know actually pursuing inorganic growth as a strategy for us and so one of the things I did was you know I got really involved in our industry trade group um even to the point where you know I served on two different boards um at different times and that gave me really incredible I would say visibility and profile within the industry so that you know when I did my reach out to potential Target companies um it was often a friendly reach out just as hey I'm just representing the industry trade group wanted again to give you a sense of you know what transpired at the last meeting and just you know kind of trade insights and and I felt like most if not everybody was very receptive to that and of course like invariably like you know the conversation at some point would turn to whether or not you know the the uh you know the company was going to be receptive to us you know engaging in some high level conversations about us acquiring them but um I would say like that use of my time um was was really kind of high return um on in terms of you know being able to just build relationships build my profile and just build credibility within within the industry to give me kind of an early look at you know Acquisitions that um you know were sourced by myself proprietarily or or maybe even through through a broker or to a banker um so it turns out you know we closed our first uh two at the first add-on acquisition was two years prior to our sale the second one was one year and the third one was actually two months prior to to our sale and they were all add-on Acquisitions where it was essentially buying a book of business um you know one of them the second one was a little larger so we did inherit and retain most of the employees I think there were nine employees not eight or nine employees that we retained uh from that deal but ultimately it was still like I think all three were pretty much like buying books of business and um I really like the timing in terms of how you know we kind of planned it out in terms of you know the add-on Acquisitions being done and then and then our exit because it allowed us to when we kind of went to Market we could show that and we did these deals and you know post deal post transaction we had you know very high retention rate you know of of those clients and so it was a real I would say compelling credible story to potential buyers that we could say okay we've grown organically continuing to do that where now we're also incredibly growing you know inorganically and it was a good story I feel like you know there's obviously different types of add-on Acquisitions right you've got your book of business acquisition which is what I pursued I feel like you know those are can be great deals in like the second half of your whole period before you exit because if you the risk is if you do those books of business deals a little too early um and you don't have a good model to really retain those clients you could end up treating you know a good portion of those clients by the time you exit the the entire deal years years down the road um on the flip side you know if you're looking at Anon acquisition that could give you access to you know a wider you know deeper pool of talent so I'm kind of more of a quasi-aquahire or an add-on acquisition that will give you access to a new market or to new product new service I feel like those Acquisitions um you know to really get the biggest bang for your for your buck are best done in the I if you can in like the first half of your whole period so that you know you can you know do the the level of integration uh you need and to extract the amount of you know value-add Synergy Revenue Synergy if it's a new product or service or new Geographic Market or human capital Synergy in terms of you know having access to like I said you know wider you know deeper deeper pool of talent because there's some latency involved right in all of these deals where I know the work that you do day in and day out may not flow through and show up in the p l until like you know several months later and so you want to make sure that you know if it is a an add-on acquisition like that that you're going to do that you know kind of well before you know your your exit time Horizon so you realize the value of that acquisition but if it's a book of business like I said I feel like you know that can be done you know certainly in like the second half of the whole period so those are just my thoughts on on and my experience you know with doing add-ons well you and you mentioned integration and I guess when it's a book of business those are kind of integrated kind of pretty seamlessly um because you're just plugging in those customers um but for for businesses or Acquisitions that are not just book a business um book of business acquisitions you know integration is is the trick and and sometimes you don't necessarily need to integrate you just kind of have two businesses that might be complementary or adjacent or even in the same space um but you decide to keep them segregated kind of or as different two different entities is there any way to generalize here some best practices or is it so Case by case that that that is hard yeah I think there is I mean I um I was like seven on both sides right so like you know when I when I sold you know the the search fund company um you know we were essentially an add-on right to a much larger platform so I've been on both sides here now the difference though is you know when I sold the the search fund company as the add-on um you know that was I guess about a year yeah it was a year before that entire company sold but I really thought that the buyer in that case did a really really good job of the of approaching the integration so their approach to integration was to really identify what I would call like you know if you look at a two by two like the low hanging fruit that would be fairly easy to um synergize and but would not have any impact on the clients right um so that that kind of like box like was like tier one priority an example would be um you know certain back office functions um you know trying to realize some some efficiency um Synergy and you know Finance and Accounting um you know corporate HR um you know things like that that were kind of like fairly easy to to realize that Synergy of um you know maybe they had um you know they were much larger scale so they had discounts on things such as you know their banking relationship or other vendors and so kind of absorbing us there as long as it didn't have an adverse impact on the client experience so conversely they were very hands-off in in a lot of other areas in terms of even even our brand you know we were able to still sell you know underneath or or you know existing local brand for a pretty long period you know I would say up to I think at least 24 months post close and so that enabled us to then you know I would say have a good show good organic growth post acquisition and to have high climate retention as well because the client experience in terms of who do they talk to for day-to-day questions who they talk to for payroll what kind of Technology platform were they using and were those workflows going to change none of that changed whatsoever uh obviously I mean it did at some point but that wasn't it didn't change I think for at least two to three years you know post acquisition and and so I thought um again the acquirer of of my search fund company did a really phenomenal job at like just identifying those easy quick wins that we're not going to have any impact to revenue and then just being you know for I would say fairly hands off and supportive in terms of initiatives that would be positively impacting Revenue Mark I know I'm looking at the clock here and I know you have a hard stop and so I I need to let you go but they're going to be a lot of people listening to this who are working on deals um if they are interested in in talking to you about investing in their deals should they come to you yeah definitely if um you know for for you know traditional funded Searchers that want to learn more about us um definitely check out the website which is ETA equity.com for the HR stuff peo stuff HR diligence uh that company is called Aspen HR and we've helped several Searchers you know with their peo and HR evaluations uh my email address is Mark with a k at aspenhr.com and yeah I appreciate you being cognizant of the time I mean I do have a a 1pm a barber appointment um you can probably tell so definitely don't don't want to miss that of course and Mark just to be clear should self-funded Searchers reach out or just traditional search fund folks any any and all all Searchers I will say for terms of you know and just purely investing as of this time you know we're we're really kind of uh focused on the traditionally funded asset class but I talked to self-funded Searchers all the time and just the context of just you know answering questions you know providing you know any advice uh particularly when it comes to like kind of the the HR you know side of those of those deals so um really just happy to talk to to anybody you know looking to looking to buy and and uh acquire and run a business great well Mark thanks for coming back on acquiring minds I will let you go and get those hairs cut uh and uh and and we'll we'll put all of his contact information in the show notes thanks very much sir thank you thanks will I hope you enjoyed that interview make sure you subscribe to the acquiring minds Channel below we are now publishing twice a week so tons of new interviews and stories to come stories that will help you along your own path to acquiring a business