Part 2 of Paul Giannamore's Private Equity Survival Guide focuses on how business owners should evaluate and choose a private equity buyer when selling their company, beyond just the price offered. Using the cautionary example of a business owner wooed by classic PE courtship tactics, the discussion covers: recognizing the psychology behind PE firms' sales tactics, the questions sellers should ask PE firms, conducting reverse due diligence and reference checks on potential partners, fund lifecycle and its implications for exit timing, operational control and board governance in deal terms, platform versus add-on acquisitions, and how running a competitive sale process improves seller leverage. Giannamore presents this from his background in sell-side M&A advisory. # Channel Identity Observations: PE-iQ / Paul Jammore ## Creator Self-Identification - **Name and role stated directly:** The host opens with an explicit self-description: *"Hi, I'm Paul Jammore. I'm an investment banker and I negotiate for a living."* (Note: transcript renders the surname inconsistently as "Janama"/"Jammore"; spelling uncertain from source.) - **Firm affiliation claimed:** He references *"Here at PE-iQ, we love to kill it for our clients"* and attributes the content to the firm's perspective: *"education is the cornerstone which allows our clients to make the best decisions for themselves."* ## Claimed Scope and Content Positioning - **Series framing:** The title positions this as **"Pt 2" of "The Private Equity Survival Guide"** and an **"M&A Masterclass."** The transcript confirms both, referencing *"the private equity survival guide"* (prior installment) and planned future content: a *"valuation master class"* and a *"buy side M&A master class."* - **Claimed expertise basis:** He states the downloadable question list is *"a culmination of 20 plus years and billions of dollars in transaction with private equity."* ## Demonstrated Audience The material addresses **two distinct audience segments**, both explicitly engaged: ### 1. Business owners / potential sellers (primary) - Direct address: *"For many of you, partnering with private equity could be the best financial decision you'll ever make."* - *"If you own a business and you're being contacted by strategic acquirers, search funds, private equity firms… take a step back and give us a call."* - The Gary narrative is framed for owners receiving inbound PE interest. ### 2. M&A advisors (secondary) - Explicit pivot mid-video: *"For advisers out there, you might be asking yourself, well Paul… how deep into the weeds do you actually get with diligence?"* - Advisor-focused coaching on client psychology: *"it's your job to inoculate your client from the psychological and emotional impact of the buyer courtship."* ## Demonstrated Content Approach - **Narrative-driven teaching:** Opens with a fictionalized cautionary story (Gary / "Cedar Fork Capital") explicitly labeled as such: *"We began today's discussion with the fictionalized account of Gary."* - **Educational structure:** Numbered frameworks ("Number one, mindset shift. Number two, run that broad process. Number three…"), question checklists, and scenario walkthroughs. - **Psychology emphasis stated as a channel theme:** *"In a lot of these master classes, I tend to focus on emotions and psychology… it is really the psychology and the emotions behind this that drives these transactions."* He cites Cialdini's *Psychology of Persuasion* (transcript: "Chelt and E"). ## Observable Lead-Generation / CTAs - Downloadable sample question sheet: *"I'll put a link below in the description… anyone can download that whether you're a potential seller or another advisor."* - Direct service solicitation: *"give us a call. We'll help you forge a plan"* with contact form and LinkedIn links. - Audience-growth asks: subscribe framing ("you're not going to want to miss what we have coming up") and *"share this master class series."* ## Tone and Positioning Signals - **Balanced-but-candid stance on PE:** Praises the industry's upside while warning of pitfalls; acknowledges *"there are a lot of very very good firms out there."* - **Casual, direct register:** Frequent profanity and blunt phrasing throughout (e.g., describing micromanagement, reference calls). - **Anecdote-backed credibility:** Repeated first-person deal anecdotes ("I've done a lot of deals with private equity firms…", a client whose price rose *"20 or 30%"* after running a process). # Delivery Observation: "The Private Equity Survival Guide, Pt 2 | Choosing the Right Partner" ## Speaker & Format - The speaker identifies himself directly mid-transcript: **"Hi, I'm Paul Janama. I'm an investment banker and I negotiate for a living."** (transcript spelling; also appears as "Paul Jammore" at the close). - The video opens with a **long fictionalized narrative** (the "Gary" story) before the speaker's formal introduction — a storytelling hook rather than a standard lecture opening. --- ## Teaching Habits & Structure ### Extended parable as framing device - Nearly the first third of the transcript is a dramatized story of "Gary" and "Cedar Fork Capital," with dialogue and scene detail: > "Gary was sold on this night. He found himself dining at Gibson's in Chicago with his two best friends." - The story is later explicitly re-anchored as a teaching device: > "We began today's discussion with the fictionalized account of Gary and his partnership with Cedar Fort Capital, which unfortunately is all too common of a tale." ### Numbered, enumerated frameworks - Repeated enumeration habit: **"Number one, mindset shift. Number two, run that broad process. Number three, he is in a position to choose."** - Also: **"Right? Number one. Number two, the seller needs to like them. And number three, the seller will reciprocate."** ### The "ask, then cross-reference" refrain The most repeated methodological instruction — a stable, recurring pattern throughout: > "ask the questions first to the private equity firm, make your list, get them all figured out, and then cross reference it to determine what if what these guys are saying is actually true." Variants appear at least four more times (board governance, exits, operational cadence, acquisitions), e.g.: > "take what they have to say now and then cross reference it. You've got a handful of CEOs who've been through this." ### Returning to Gary as a recurring example Gary is invoked throughout as a recurring case study long after the opening story ends ("if I'm Gary and I think to myself, my deal is 100 million"), keeping the parable alive as scaffolding for new concepts. --- ## Language & Vocabulary - **M&A jargon used freely, sometimes with light glossing:** proprietary deal flow, LPs, IRR, drag-along/tag-along rights, rollover equity, platform vs. add-on acquisition, "second bite of the apple," "chips off the table." - **Colloquial hyperbole and profanity** for contrast with the jargon: > "Gary could barely take a dump without their permission." > "they didn't let us do jack shit." - **Colorful metaphors:** "smorgus board of questions" (used twice), "band of former CEOs," "toiling in the vineyard," "they're not the only girl at the bar." ### Recurring filler/phrases - **"Right?"** as a constant discourse tag — appears dozens of times ("we like people who like us. Right?", "That's their job. Right?"). - **"At the end of the day"** — a signature phrase, repeated at least a dozen times: "but at the end of the day, that's what these guys do." - **"So on and so forth"** — repeated list-ending filler ("Here's organic growth. Here's what we'll do in acquisition. So on and so forth."). - **"You know"** as frequent conversational connective. --- ## Communication Patterns ### Direct address to segmented audiences The speaker explicitly pivots between listener groups: - **Business owners:** "For business owners out there, I think it's important to take a step back." - **Advisers:** "So, for advisers out there, you might be asking yourself, well Paul..." ### Conversational self-questioning and hypothetical dialogue A consistent habit of voicing both sides of imagined conversations in character: > "Hey Gary, we think we're probably going to hold this 5 years or 3 years." > "Gary, Cedar Fork Capital, what are you talking about? Like cluster's more like it. Better watch your six, Gary." This dialogue dramatization recurs throughout — with Joe Blow, John and Chris, and the wife Judy. ### Rhetorical questions to the audience > "How many of you actually have a proper board in place? Many of you don't." ### Personal anecdote and first-person credibility claims - "I am an LP in a brand new fund. I'm in a fund one right now." - "This is a culmination of 20 plus years and billions of dollars in transaction with private equity." ### References to external authority - Cites Cialdini by name (spelled variously "Chelt and E," "Jaldini" in the transcript): "he talks about the principle of liking right? we like people who like us." - Frames his approach as psychology-driven: "in a lot of these master classes, I tend to focus on emotions and psychology." ### Calls to action / self-promotion close The ending is promotional and resource-offering: > "click on the link below to download the questions you should ask private equity... take a step back and give us a call." --- ## Stable Patterns vs. Isolated Moments | Feature | Evidence strength | |---|---| | "Right?" tag, "at the end of the day," "so on and so forth" | **Strong** — repeated many times | | Story-driven teaching, recurring "Gary" example | **Strong** — spans the whole transcript | | Ask-then-cross-reference method | **Strong** — repeated across topics | | Audience segmentation (owners vs. advisers) | **Moderate** — two to three explicit pivots | | Named-authority citation (Cialdini) | **Isolated-ish** — mentioned twice, only in the persuasion section | ## Uncertainty Notes - Transcript quality is imperfect (e.g., "Perry Pass"/"Perry Boo," "Cedar Fort"/"Cedar Fork," "weight list"), so exact spellings of some phrases are uncertain. - Tone of voice (warmth, pacing, humor delivery) cannot be verified from text alone; observations above rest on lexical and structural evidence only. # Position Extraction: "The Private Equity Survival Guide, Pt 2 | Choosing the Right Partner" **Speaker:** Paul Jamino (transcript spelling varies: "Janama"/"Jammore"), self-identified investment banker who "negotiates for a living," presenting an M&A masterclass. --- ## 1. Framing Narrative: The Fictionalized "Gary" Story - Presented as a **fictionalized account** of a founder selling to "Cedar Fork Capital" — Jamino explicitly calls it "the fictionalized account of Gary and his partnership with Cedar Fork Capital, which unfortunately is all too common of a tale." - Key plot positions: - Gary is courted via first-class flights, Gibson's steaks, Bulls courtside tickets, a gold Rolex Daytona — the deal closes within 60 days; Gary receives a large wire and rolls 30% into a platform company. - By month six, "hands-off" turns out to mean micromanagement; "help with strategy" means needing permission for nearly everything; "growth-oriented" means "seemingly impossible" monthly KPI targets; "founder friendly" contrasts with no portfolio company still run by its founder. - Quoted consequence (Judy, Gary's wife): > "I've watched you bust your ass for 30 years... So you'd never have to work a job for people you don't believe in. Yet here you are." ## 2. Core Thesis: PE Partnership Outcomes Depend on Process and Partner Selection - Jamino states partnering with PE "could be the best financial decision you'll ever make" — he "knows scores of people who are hundreds of millions of dollars richer because they did this the right way." - Benefits he attributes to PE: access to capital, marketing/advertising capability, board governance, peer portfolio-company networks, add-on acquisitions, industry consolidation, and an **emotionless exit process** ("no concern for the culture, no concern for the legacy" — he acknowledges "that scares some folks"). - Counterweight: choosing the wrong partner yields "an unmitigated disaster." ## 3. Two Seller Types - **Type 1 — "doesn't give a damn":** Sale is a means to an end; full change of control, cash up front, short (6–18 month) transition. Focus on **headline price** via competitive process. - **Type 2 — "cares very deeply":** Uses PE to diversify and magnify wealth (e.g., sell 70%, roll 20–40%). Spectrum of desired roles: full control, figurehead/spokesperson, or board member only. Focus is **the partner, not the headline price**. - Foundational advice: "the most important thing that you can do at the onset is determine what it is you want." ## 4. How Gary Failed (Per Jamino) - **Tunnel-vision buyer universe:** Gary treated inbound emails as the whole acquisition universe; Jamino argues the seller "is the prize" with possibly "hundreds of potential buyers." - **Psychological capture:** He invokes Cialdini's principles — **liking** and **reciprocity** — explaining the wining and dining, gifts, and time invested made Gary psychologically unable to "cheat on" the buyers. - **No diligence:** Gary never asked about operations, KPIs, or interviewed former portfolio CEOs. - **No leverage:** Because there was no competing buyer, even a skilled attorney had "zero leverage"; anti-Gary terms stayed in the purchase agreement. - Jamino's qualification: "they were probably very honest with them. They were just speaking two very different languages" — the disaster wasn't necessarily lying, but mismatched understanding. ## 5. What Gary Should Have Done — Prescribed Method 1. **Mindset shift:** "He is in a position to choose. He does not need to be chosen." 2. **Run a broad competitive process:** Contact 40–200 PE firms (industry-specific and generalist), plus 5–6 strategics for price pressure. 3. **Interview the finalists** on: - **Fund number/lifecycle:** Fund one = newer/riskier (qualified: "I'm an LP in a brand new fund... I don't think you should exclude a private equity firm just because they're fund one. It just means you have to do a little bit more diligence"). - **Capital remaining:** How much of the fund is deployed; runway for add-ons. - **M&A decision rights:** Who approves add-ons — partners or a distant investment committee; whether LP consent is required. - **Return targets:** Stated IRR/multiple targets, cross-checked against what past CEOs actually received ("Past practice of course doesn't guarantee future performance, but it certainly illuminates how these guys operate"). - **Operational cadence:** Who sets strategy, budgets, KPIs; reporting frequency; approval thresholds. He notes a spectrum from "buried in constant Zoom calls" to near-silence with quarterly boards. - **Deal terms:** Pari passu vs. preferred equity, liquidation preferences, management fees (1–3%, which "will hit your returns"), rollover ratchets, management option pool dilution. - **Board governance:** Composition, veto rights over members (he is critical: PE firms "will pretty much pull anyone that has a pulse" as operating partners, some providing "zero value"), meeting preparation burden — while noting boards "can and does provide a lot of value... it just has to be set up right." - **Exit:** Intended hold period, exit type, who decides ("at the end of the day, it is the private equity firm, unfortunately"), drag-along/tag-along, whether the founder could be forced into a second hold period under a new PE owner. He cites 2020–2021 as a case where frothy markets compressed holds below the historical 4–6 years. 4. **Cross-reference everything** with former portfolio CEOs ("the band of CEOs"). ## 6. Platform vs. Add-On; Fund Size Effects - "The majority of us will be add-on acquisitions." - **Fund size matters:** A small platform in a large fund risks being subsumed — illustrated with a Breeze Airlines/American Airlines hypothetical (if the big fund later buys American, "they are not going to rebrand American Airlines" as Breeze). ## 7. Advice to Advisors - Jamino changed his own practice: he **no longer joins reference calls**, having found former CEOs "say more when it was one-on-one" with the seller. - He provides clients a question sheet and a research dossier (max ~five firms per process), tracking founder departures: "Did he quit? Was he fired?" - On references: requesting them yields "testimonials"; independent research surfaces the hidden unhappy seller. - **Caution against overreaction:** One bad reference shouldn't kill a deal — some failures weren't the PE firm's fault, or the firm "learned and repented for their sins. You don't want to necessarily throw the baby out with the bath water." His method: confront the PE partners with negative feedback and let them explain. - **Inoculate clients psychologically** against buyer courtship: the ~$25k spent entertaining is a great ROI against a "$30 million discount." Advisors should "stack the deck" with competing buyers so no single buyer is "the only girl at the bar." ## 8. Supporting Anecdotes (Unverifiable, Speaker-Attributed) - A client who suspected underpayment (~$50M vs. ~$75M value), felt he'd "cheat on" his buyers by engaging an advisor; after a full process, achieved "20 or 30% more" than the originally contemplated deal price — the original buyer refused to participate ("this is insulting"). ## 9. Overall Stance on the PE Industry - Balanced with qualifications: "I think most of these guys are straightforward and honest," "everyone's got a [bad] story," "there are a lot of very good firms out there... snafus do happen." - Repeated emphasis: deal outcomes are driven by **psychology and emotion**, not spreadsheets. - Closing pitch: promotes PTOIC's services, a downloadable question list, and upcoming masterclasses (valuation, buy-side M&A). --- ## Preserved Tensions & Qualifications - PE's emotionless exit style is presented as both a benefit and something that "scares some folks." - Fund-one firms are risky but not disqualifying — Jamino is himself an LP in one. - Bad references may reflect seller error or a one-off firm failure, not necessarily a bad partner — hence the "grain of salt" instruction. - The Gary narrative is explicitly fictionalized; Jamino asserts it is "all too common" based on his experience (assertion, not sourced data). # Speaker Attribution & Provenance Record **Video:** *The Private Equity Survival Guide, Pt 2 | Choosing the Right Partner | An M&A Masterclass* (ID: `01a168c7-c7b9-77a6-aed3-ed63d58a1879`) ## Speaker Inventory - **Paul Janze (Jammore)** — **Creator / host** - Self-identified: *"Hi, I'm Paul Janama. I'm an investment banker and I negotiate for a living."* - Delivers the full instructional content: psychology of PE courtship, seller typology, diligence questions, deal terms, governance, exits, adviser guidance. - Name appears as both "Janama" and "Jammore" in the transcript (transcription variance; single speaker). - **Narrator voice (opening dramatization)** — same creator, narrating a **fictionalized account** of "Gary" and "Cedar Fork Capital" (later explicitly labeled: *"the fictionalized account of Gary and his partnership with Cedar Fort Capital"*). No separate narrator is identified. ## Fictional Characters Within Narrated Segments These are **illustrative dramatization**, not real speakers or sources: - **Gary** — fictional founder/seller from Tulsa - **John and Chris** — fictional Cedar Fork Capital (also "Cedar Fort") PE partners - **Judy** — Gary's wife (quoted) - **Joe Blow / Joe Smith / Randy Coleman** — hypothetical reference-check figures in adviser guidance segments ## Referenced Third-Party Sources & Claims - **Cialdini, *Psychology of Persuasion*** — cited for principles of **liking**, **reciprocity**, and **investment** (also "principle of investment" attributed to the speaker's own M&A masterclasses). - **2020–2021 capital markets conditions** — referenced re: compressed PE hold periods; attributed to general market observation, no named source. - Anecdotes attributed to the speaker's **~20+ years of deal experience** and unnamed **clients/former sellers** (e.g., the $50M/$75M client story, one-buyer-auction client). Unverifiable, unsourced beyond first-person claim. ## Promotional Segments (Flagged) - **Closing segment:** promotion of the speaker's firm, **"PTOIC"** — *"give us a call... contact form in the description... contact me directly on LinkedIn."* - **Lead magnet:** *"click on the link below to download the questions you should ask private equity"* — framed as culminating "20 plus years and billions of dollars" of experience. - **Upcoming content promotion:** valuation master class, buy-side M&A master class, more PE content; request to share the series. ## Availability Limits & Uncertainty - No curated metadata was supplied; all attribution derives from the transcript alone. - **Comments availability:** not stated — unknown. - Speaker surname spelling is uncertain (Janama / Jammore); no external verification available. - All Gary/Cedar Fork narrative content is explicitly fictionalized and should not be treated as factual reporting. Gary was sold on this night. He found himself dining at Gibson's in Chicago with his two best friends. Chris and John had been fawning over him all evening. Heck, they just flown him in first class from Tulsen just for this dinner. Gary, we love your business. We want to do this deal. Now, keep in mind at Cedar Fork Capital, we're hands off, but we'll help you with strategy and we're growth oriented, but always found friendly. Think about it. The chips you're going to be able to take off the table today are going to be massive, but that second bite of the apple a few years from now is going to be huge. Chris nodded an approval and joined in. Gary, I've been doing this for a long time. And I just know a good partnership when I feel it, and this just feels right. And did it ever feel right to Gary? As John reached over to grab the check, he noticed Gary eyeing his watch. Hey Gary, you like that? Here, try it on. As Gary felt the weight of the solid gold Rolex Daytona on his wrist, Chris chimed in, "Wow, Gary, that looks great on you. Judy would love it. You know, it takes most people three or four years on a weight list to get one of those. But you being a Cedar Fork man, we can get you soy pr you'd be one of us, Gary." And it was in that moment when Gary realized he had finally joined the club. Real executives were recognizing him for his abilities and his life's work. As Gary reveled in the moment, John stood up. Hey Gary, time to go. Courtside tickets for the Bulls. And with that, the whirlwind relationship was consummated. Within 60 days of that dinner, Gary received a wire transfer for more cash than he had ever seen in his entire life. Gary now owned 30% of a platform company in partnership with private equity. And a journey that began with excitement and anticipation soon gave way to a very different reality. By month six, Gary was struggling. Sure, he was still in contact with his new friends John and Chris, but instead of smiles and adoration, they questioned his every decision. The Cedar Fork guys did keep their promises. However, they were slightly different than how Gary understood them. When they said they had a hands-on management style, what that actually meant was they would micromanage the living \[ \_\_ \] out of Gary and his team. When they said they would help with strategy, what they actually meant is Gary could barely take a dump without their permission. \>\> When they said they were growthoriented investors, what that actually meant was every month they would deliver Gary and his team a seemingly impossible set of KPI targets to him. should be interesting. And the Cedar Forp guys talked a big game about being founder friendly. But at the most recent portfolio company meeting, Gary was hardressed to find one single portfolio company that was still managed by its founder. As for the watch, they did keep their promise there. Gary took it home from the closing dinner, but he soon stopped wearing it after both his brother-in-law and his nephew asked him for a loan. Oh, and they were right about him being in the club. As a Cedar Forkman, it was his responsibility to go out and court potential sellers. But instead of stakes at Gibson's and courtside at the Bolts, it was PF Changs and nine long innings of the Tulsa Drillers. Neil's like, "You're out." \>\> But it was words of his wife Judy that cut Gary the hardest. She said, "I've watched you bust your ass for 30 years." \>\> So you'd never have to work a job for people you don't believe in. Yet here you are. Hi, I'm Paul Janama. I'm an investment banker and I negotiate for a living. Today, we're going to talk about how to look past the pitch decks, the stake dinners, and look into really how private equity works in order for you to make the best decisions in choosing a potential partner. For many of you, partnering with private equity could be the best financial decision you'll ever make. I know scores of people who are hundreds of millions of dollars richer because they did this the right way. If done correctly, private equity can provide you a lot of things you don't have. For example, the access to capital that you don't have today. Marketing, advertising capabilities, board governance. How many of you actually have a proper board in place? Many of you don't. the ability to hobnob with other portfolio companies and learn from CEOs. You're part of the club, so to speak. There's a tremendous amount of things that private equity can bring to your business, helping you do add-on acquisitions, helping you consolidate an industry. As well as at the very end of the line, when it's time to sell your business, it'll be done without emotion, right? These private equity guys spend their entire lives buying, building, and selling businesses. And so when they ultimately go to sell, they're going to do it the right way. They're going to run a competitive process. They're going to take the highest offer on the best terms. No emotions involved. No concern for the culture, no concern for the legacy, so on and so forth. And I know that scares some folks, but at the end of the day, that's what these guys do. And it's an opportunity to really create substantial wealth for yourself. But if you do it the wrong way and you choose the wrong partner, you'll potentially find yourself in the same position that Gary did, an unmititigated disaster. This is what we're going to talk about today. Broadly speaking, there are two types of individuals who sell to a private equity firm. First is the person who doesn't give a \[ \_\_ \] Second is the person who cares very deeply. So for the first person, the sale to a private equity firm is just a means to an end. It's an entire change of control. This might be an individual who's getting up in years and just wants to retire, hires an adviser, goes out to a full process. In the competitive process, the private equity firm prevails as the highest bidder. Now, the private equity firm might look at this and say, well, we don't necessarily need this seller as CEO. We've got an operating partner we can bring in. We've got a CEO we can recruit. So this person is able to sell the business, take all their cash up front or roll a very small portion, transition over a relatively short period of time. So it might be 6 months, might be 12 months, might be 18 months, but at the end of the day, this person gets the cash in the bag, walks away, doesn't have to worry about the business. Now, the majority of us are folks who care very deeply about the business and might use private equity as a tool to not only diversify our wealth, but magnify that. So for example, we might sell 70% of the business today. So we take the proverbial chips off the table. Cash is in the bank. We can deploy it elsewhere. Now we've diversified the wealth that we have locked up in our business. And then we can roll some equity. It might be 20%, 30%, 40% into new co. So this is in partnership with the private equity firm. And in those cases, I find that sellers fall kind of on a broad spectrum. Some want absolute control of their business and they want private equity to come in as kind of a relative silent partner. Others are more interested interested in diversifying their day-to-day life. So, you know, I've been CEO. Now, I want to be a figurehead or a spokesperson. I want another operator to come in. And then some folks want to really just step back and be on the board. And as we talked about in the private equity survival guide, the most important thing that you can do at the onset is determine what it is you want to do. What are your goals and objectives? Are you person one, you just want to take cash and run? Then private equity might work for you, but that's not where you want to focus your efforts. You want to focus your efforts on a on a competitive sale process. And if the private equity happens to be the highest bidder, then boom, you're done. But if you're looking at this saying, "Hey, I might have five or 10 more years in me and I have built an interesting business, but I don't have the same sort of access to capital that my competitors have. I don't have the skill set and experience to do a lot of add-on acquisitions, but I know a lot of potential targets I could go out and buy. Um, I might need to upgrade my financial systems and bring in a slightly better CFO that I have right now, which is really just a glorified bookkeeper and accountant. Private equity might be a phenomenal way for you to accomplish those goals all the while diversifying some of your wealth as well as putting you in a position instead of owning a business that's worth $100 million 5 years from now might put you in a position to own a sliver of a $750 million business 5 years from now. Unlike this first group of people where the focus is the headline price, in this group the focus isn't on the headline price, it is on the partner. And that's what we're going to focus on today. We began today's discussion with the fictionalized account of Gary and his partnership with Cedar Fort Capital, which unfortunately is all too common of a tale. And today we're going to talk a little bit about how Gary got himself in this position to begin with and what Gary could have done to really set himself up for a win. Gary had worked hard over the last 30 years building his family business and never really thought about selling it. But like you, he receives a lot of emails in his inbox and calls private equity firms and search funds telling him, "Hey Gary, we're super interested in your sector. Congratulations on your widget making prize in 2021. You'd be the perfect platform acquisition for our fund. Do you have time to get together?" So over the years, Gary received more and more of these emails, and his buddy at the club told him that Uncle Jim finally sold private equity, made a killing. Another one of his friends sold to a strategic acquire. So Gary started to think to himself, you know what? The house needs an addition. The wife wants to take more vacations. Maybe I'll investigate this. Like most folks, he really didn't understand private equity. To him, they all sounded the same. But he thought, you know what? Let me start to take some meetings. So he responded to Cedar Fork Capital. John and Chris jumped at the opportunity to sit down with Gary and instead of coming down to Tulsa. They decided to fly him up to Chicago where their home office is. Gary jumped on a plane, went up to Chicago and heard all these great stories about business owners over the years that they had made millions of dollars for. And they explained to Gary, "Hey Gary, you've got the opportunity to sell a portion of your business today. You could put the addition on the home, buy the boat, take your wife on vacation, and then you could roll some equity and invest with us. You'd still be the CEO of your own business. But ideally, that position that you'll roll, the 20 or 30% of the equity that'll remain in the company will be worth more than what you're taking home today, four or five years from now when we ultimately exit. And of course, you want to exit with us. We're the experts at doing this, Gary. So Gary went back to Tulsa, had a conversation with his wife, and you know, again, he had never really thought about selling, but he was getting all this interest, and now it began to wet his appetite for diversifying his wealth, taking the some of the proverbial chips off the table. Gary went out and had dinner with three or four other private equity firms that had shown interest in his business, but he didn't really feel the same as he did about John and Chris. They seemed like good guys. They were straight shooters. He liked the office in Chicago. a lot of great success stories and he felt comfortable with that. John and Chris were honest with him. They were operating from the private equity playbook. And how does that work? Number one, proprietary deal flow. Private equity guys don't want to deal with guys like me in competitive auction processes. They want to get proprietary deal flow with folks like Gary who think that the buyer universe is just the companies that are giving him inbounds. Right? Gary's not looking at the fact that he actually is the prize. He owns a scarce asset and there might literally be hundreds of potential buyers for this business. His buyer universe is very narrowly focused. It's the folks that have reached out to him. And of the folks that have reached out to him, he liked Chris and John the best. And of course, Chris and John are again focused on doing exactly what it is they're supposed to do. You know if you take some pages from Chelt and E psychology of persuasion number one he talks about the principle of liking right we like people who like us. So they pile on the adoration they fawn over him they praise him. It felt really good to Gary. He was getting recognition from starting this business from scratch and over three decades building it into something substantial. They recognized that and it made him feel good. They liked him. He liked them. Of course, they piled it on further by taking them out to dinner, courtside at the bulls, gifts. They spent a lot of time, money, and effort. And in the M&A master classes, I talk about the principle of investment. Jaldini talks about the principle of reciprocity, right? So, as humans, whenever somebody gives us a gift or a concession, we have an overwhelming feeling to return the favor. What that does is that further locked Gary into this form of tunnel vision. The private equity guys wanted to make sure that he believed they only had eyes for him and vice versa. And the more they invested in Gary with regard to time, money, and effort, the more difficult it would be for Gary to quote unquote cheat on them and deal with other parties. So as the acquisition mating dance took place over the course of a few months, they flew Gary up to Chicago. multiple times. He felt more and more comfortable with them. He understood, "Hey, I'll take chips off the table today. I'll roll some equity. I'll still be CEO." He never questioned them about what operations look like. He never asked them questions about what sort of KPIs he would get. He never interviewed former CEOs of the portfolio companies. He didn't feel the need to. I mean, at the end of the day, these guys are the experts. So, what does he really need to do? And no one ever educated him as to how to go about doing this. So, uh, he felt very comfortable and on that last trip to Chicago, he decided it was time to pull the trigger. He signed the deal. Now, of course, in diligence, because there was no competition for the private equity firm, although Gary hired a very experienced, highly skilled attorney, the his attorney had zero leverage because at the end of the day, the private equity firm had no competition. So, they were able to really call the shots. So, with regard to the purchase agreement, there were some less than optimal terms in there for Gary, but you know, Gary looked at it and said, "I've got this high price attorney, and all he wants to do is kill the deal." Gary was already sold in his mind, and he emotionally and psychologically bound to these guys. And that's what happened. The deal closed. No questions were asked. No diligence was done. Gary went on faith because he liked these guys and he believed in them. And six months later, it was a train wreck for Gary. So, a lot of this stuff happens very, very innocently. You start to have these dinners and conversations. You slowly, as a seller, start to focus on one particular buyer. You don't do the appropriate diligence that you need to do and next thing you know, you're caught no bad deal. I've met a lot of people like Gary over the years, and I really feel for them. You know, as businessmen, they're focused on running their business. They're not thinking about the acquisition universe. They're not thinking about competitive processes. They're not thinking about how to do diligence on financial sponsors and private equity firms when they barely know what those guys do. And every one of them sounds the same. So, this is a recurring theme I've seen over the years. We talk about what Gary did. Here's what Gary should have done to put him in the absolute best position to get the highest price, the best terms, as well as the best post deal outcome. Now, the first thing he needed to do was shift his mindset. I mean, Gary, like many people get these emails and calls and they believe, okay, this is the acquisition universe. That's not the case. Gary has to realize that he is the prize and his business is a very scarce asset and there's going to be a lot of potential buyers vying for this. So he needs to think from an abundance perspective and he needs to go out and be the hunter rather than the fisher. And I've talked about this on the sell side M&A master class. You know when you're selling a business, you don't wait for buyers to come to you. You go out and locate those buyers and you run a competitive process by introducing competition. the Cedar Fork guys would not been able to squeeze him on terms and price because the more optionality Gary has, the stronger his resolve is in negotiating. So number one, mindset shift. Number two, run that broad process. Number three, he is in a position to choose. He does not need to be chosen. He is interviewing the private equity firms, not the other way around. So he needs to take control of that process. And so Gary decided, hey, I've got a wonderful investment opportunity. I've got a five plus year horizon. I want to take some chips off the table. I want to build this thing and I want to exit it for a massive payday 5 years from now. Now I've got to find the right partner. And so instead of finding himself in the position where he's talking to Cedar Fork and maybe one or two other players, now he's got 50 or 60 private equity firms. He's gone out and researched which private equity firms have made investments in my industry both past and present. They certainly get contacted. Which other private equity firms are generalists and would likely take a look at my industry and my business? They get contacted. You go broad. It might be 40. It might be 50. It might be 200 private equity firms. You might sprinkle in five or six strategic acquirers just to push upward pressure on price. But you run that full process and then once you whittle it down, you get it down to the last maybe two, three, four players, you've pushed up the price. You know, Gary was originally focused on the headline price, but as I said earlier on in our discussion, it's the pros that are really focused on the partner. Once you get that price up to where it should be, now you focus on the partner. So once you've got those two, three, four, five private equity players, now you're able to go sit down with them and you start asking them questions. They begin with, who are you? Right? So what fund are you in? Are you in fund one, fund two, fund three, fund four? Um, sometimes when they're in the first fund, that means that the private equity group is new, right? They've just raised one fund, and that might be risky, right? They don't have a track record. You got somebody that's in fund five or six, especially five or six, and you've got the same limited partners or LPs investing in each of these funds. They've got a track record, right? These LPs are coming back. They're getting a return. So, they want to invest in the next fund that, oh, we did a great job. Next fund. I'm not saying that you shouldn't partner with somebody in fund one. I am an LP in a brand new fund. I'm in a fund one right now. But the reason why I'm in the fund one is because the guys who put this firm together came from other firms that I respect. They have a track record and I think they're going to kill it on this. So for me, investing in fund one was exciting. Um again, I don't want I don't think you should exclude a private equity firm just because they're fund one. It just means you have to do a little bit more diligence. You might want to talk to their LPs. Now you sit down, you ask private equity firms that, hey, one says I'm in fund two. Okay. Well, where are you in fund two? How much capital have you already blown through in fund two? Well, fund two is a billion dollar fund and we've spent a half billion dollars already. Well, 50% of the fund is now extinguished. So, how much runway where there'll be for you? And so, you can take that when you sit down with the private equity fund and now you're writing down your questions and you're going to cross reference everything with the past portfolio companies, right? So Paul, we're in fun five and you know we're about a third of the way through. Okay, that might be acceptable. When I check the references, or rather when Gary checks the references, now he's going to be able to talk to the other CEOs and say, "Hey, where were you when you partnered? Where were they in the fund? Were they in the beginning of the fund, the middle of the fund, the end of the fund? And how did that impact you?" Um, you'll be able to ask them, how many platform companies are will you acquire in this fund? I mean, it's like, hey, you've got a billion dollar fund and they're committing, you know, 150 million in equity per platform company. How much is left over for acquisitions? So, understanding how many platforms will fit in each fund, of course, is important. And then getting the private equity firm to commit to you up front, it's like, hey, I've got this great business in Tulsa. You're spending $100 million on it, and there's a lot of potential acquisition opportunity out there for us. I as Gary want to grow the heck out of this thing and I want to do a lot of different deals. I don't want to be reckless, but I think I know a lot of competitors we can go out and buy. How much capital are you setting aside for me to do M&A? Then with that answer, now you're able to go back to the past founders and CEOs and say, "Well, how much did they tell you they were going to be able to invest in acquisitions? Did they How were they when they invested in acquisitions? Were they reckless paying any sort of number? Were they far too disciplined and running scared? Right? So, you never got any deals done. So, how much money did they promise you that they'd be able to invest in acquisitions? How much did they actually deploy? Who made those decisions? So, private equity firm, we've got an acquisition target. I bring somebody to the table. I think it'd be great for this business. Who do I need to talk to? Is it the partners I work with? Does the investment committee whom I don't even really know the investment committee and they don't really know my industry. They're just finance merits. Are they the ones making the decision as to whether or not I can go out and make this acquisition that I think is going to grow the \[ \_\_ \] out of my business? I don't know. So, I need to know that. What do the LPS have to say? I mean, do we have to go to LPs and ask their permission for us to do an add-on acquisition? Like, how far on does this actually go? Like, what does the decision tree look like? And then again, cross reference that with the past portfolio CEOs. What did they go through? What was it like to actually do a deal? How did they have to support that? Was it was the fund reckless? Was it too disciplined? Where was it? So, I think these are all important questions because again, if I'm Gary and I think to myself, my deal is 100 million. I'm rolling 30 million into this. So, I'm going to own 30% of this. Then I want to go out do deals. How much is available for me to acquire? like I know that I can go out and spend 300 million and I can grow this business. Does that capital exist? How do we fund this? You know, Gary, it would also be wise to ask each private equity fund what the required rate or targeted rates of return, their IR or multiple on the fund is. So, some private equity firms will say we need to earn 3x our money or we've got an IRRa target of 25%. That's all well and good. Those are their targets. Now go back to the CEOs. Hey guys, what did they tell you the targets were? What did you actually get out of this? John, you sold your business to XYZ Capital for 100 million bucks and you exited how much did you exit for? What was your internal rate of return on your investment? Past practice of course doesn't guarantee future performance, but it certainly illuminates how these guys operate and how disciplined they are in deploying capital. So asking the questions first to the private equity firm, make your list, get them all figured out, and then cross reference it to determine what if what these guys are saying is actually true. I mean, what you might hear is, "Hey, we're really handsoff. We let the founders make all the big decisions and then you talk to the former founders and they're like, "Hey, they didn't let us do jack shit." Like, I'd ask for permission to take a dump. That'll inform you how honest these guys are being with you. Another area Gary really could have focused on is operational cadence, right? Cedar Fork said, you know, we're hands-on, but we help you with strategy. Gary really didn't get into the details. What does that actually mean? So, again, if we start with the private equity firms and then we cross reference with former portfolio or platform uh presidents, we can get a really solid idea of what's going on. So for example, questions that Gary might have is, okay, who actually is forging strategy for the company? Who's actually putting together the budgets and the forecasts and the targets that we need to hit? Right? Is this something that's mandated from the top down? We've got some finance nerds in the background saying, "Hey, this business should be growing 15% per year organically, which you know is near impossible." Um, or is this something that you and your team are are using aggressive goals? Um, because obviously you're an investor in here and you want to grow the heck out of this business, but is this coming from you or is it coming from them? You know, again, portfolio presidents, how do they deal with you? What's the cadence? I mean, do you report to these guys daily, weekly, monthly, quarterly? And what level of approval do you need for ordinary day-to-day decisions? Does the private equity firm and the board step in for big asset disposals, acquisitions, refinancings, or if you need to buy a new trunk um or hire a new mid-level manager, do you have to go to the board? Again, ask the questions of the private equity firm, cross reference. When I talk to sellers who've sold a private equity, I hear a variety of different things, and it's a spectrum. On one end of the spectrum, I hear, "Hey, I've been buried in constant Zoom calls and updates." On the other end of the spectrum is, "Hey, Paul, I feel like I didn't even really do a deal. I mean, we have quarterly board meetings and they check in and make sure we're hitting our numbers, but other than that, I don't hear from them." And then there's a wide ground in between. Understanding this operating philosophy is going to be paramount to you. Especially if you're like Gary and you want to run the business, you want strategy, you want to make acquisitions, you're probably and and if you're competent, you're probably going to want more of a hands-off approach. You're going to want the private equity firm to say, "Man, Gary really knows what he's doing. I mean, he's done a great job over 30 years. He's really growing this. Let's not touch this. let's provide him the resources that he needs and he's going to grow this investment for us. So if that's you, that's the cadence you'd want. Other folks though might find themselves in a position where they've the business has somewhat outgrown them. And this is a real situation where you've worked for many years. You had a $5 million firm, then a $10 million firm. Now you got a 50 million in revenue business. and you're feeling like it's getting a little chaotic and complex for you, like you don't have the skills and resources to manage it like you used to. That's okay. You might want more of a hands-on approach. You might want them recruiting and bringing on an operator to help you. And again, that at the end of the day, you're trying to safeguard your investment. They're trying to safeguard theirs. So, this isn't a pride thing. If you need that help, you might want more of a consistent operating cadence at a shorter interval where the private equity firm is checking in with you more often and providing more assistance. So, it depends upon your capabilities and it depends upon your desire, but you've got to make sure that operating philosophies match. Some firms are very hands-off. I mean, I've done a lot of deals with private equity firms that are very, very handsoff. I've also done some that are hands-on. If there's not a good match between you and them, there's going to be friction and then you're going to find yourself like Gary hating getting out of bed every morning. One of the most important things when partnering with private equity is actually starting off on the right foot. And what I mean by that is making sure that the deal terms are appropriate from the get-go. So you get to the closing table, then you get into postclose, you don't have all sorts of awkwardness. Let me give you some examples. If you're partnering with private equity, are you investing Perry Pass with them? So in Gary's case, he rolled 30% of that business. $100 million transaction, $30 million gets rolled. Now he's partnered with Cedar Fork Capital. Do they both own the same slug of equity with the same rights? Are they both in at common? Are they in at common and preferred? Or does the private equity firm have any liquidation preference, for example, on top of that? meaning that they get paid out before Gary does in the event something goes ary. A lot of these deal terms get buried in equity participation and purchase agreements and they need to be vetted. And that's why I always say in a competitive process, it's extremely important that that all gets figured out in the term sheet even before you get to the asset purchase agreement. What sort of equity is being acquired here? Further, where is there a management fee? Right? So the private equity firm is sits up at top and then we've got the fund below. The private equity firm will typically take a management fee from the fund. Is the private equity firm taking the management fee before will you get paid or is there no management fee on your equity? Are you excluded from that? And it's a very important aspect because management fees can be anywhere between 1 and 3% which over time will hit your returns. So, understanding that, I'm not saying what's right or wrong. It's obviously preferred that you're not paying a management fee. And there are a lot of private equity firms that will do that. Um, understanding that so there's no confusion and you can bake that into your projected returns, I think, is very, very important from the outset. Again, had Gary were on a competitive process, he would have been able to eliminate a lot of these things as issues because all the private equity firms would have been on the same footing. the purchase price would have been driven up simultaneously and a lot of the funky terms that were anti-Gary would have been removed from the term sheet as opposed to him just dealing directly with one acquirer with zero competition and quite frankly zero incentive to remove anything that in any way shape or form impaired their position at the investment. Gary would have been very well served to focus on what corporate governance looks like postc closing. Who sits on the board? How many board members are there? Does he have the ability to veto anyone from joining the board? Meaning, let's say that you've got the industry dumps that you've known for 20 plus years and he's worked for fiveyear competitors. You can't keep a job. Now, private equity firms nowadays will pretty much pull anyone that has a pulse sometimes as an operating partner or put them on the board. And I've seen it. A lot of these guys provide zero value whatsoever. In fact, I think some of the stuff that they say could potentially be detrimental to the investment. Do you want a total \[ \_\_ \] who's worked in your industry on your board and will you be able to do anything about it? It's an important question to ask because I see this happening. So board governance, how often the board will meet, what the board decides on. What do you need to do at the board meeting? Well, you're the CEO, so you're going to be presenting. What do you need to do in order to prepare for that board meeting? What team will help you with that? Is that somebody internally at your company that's going to be preparing a board book, or is that somebody you'll have at the private equity firm that's going to help you prepare that? So understanding that is important because for the most part board meetings will not require a lot of preparation from you. However, if you don't have the resources and you're not used to doing this, you could end up spending a lot of time getting prepared for every quarterly board meeting, which quite frankly can be quite stressful. So understanding that cadence, how the board's set up, what the board will do, when the board will meet, how you'll get prepared for the board meeting, I think is going to be very important because 90 plus% of midsize businesses do not have formal boards and are not used to dealing with this sort of red tape. Now, I do think that the board can provide a lot of benefits and so you shouldn't look at it and say, "Damn it, now I have to report to a board that sucks." No, I mean, the board's there for a reason, actually. and the board can and does provide a lot of value. Um, it just has to be set up right and you have to understand the role of the board and how you get prepared for the board. So these are important questions and what I always say is first again ask the private equity firms you're talking you know Gary's talking to three or four of them now ask the partners what they have to say about it and then go back to the band of CEOs guys what was it like going to a board meeting how did you prepare what sort of questions did they ask you was it stressful get that all figured out and then compare and contrast what you learned from the private equity firms as well as their past prof and current portfolio of companies. I think they're great folks to talk to. You know, an important aspect of partnering with private equity, of course, is the exit, right? The front-end consummation of the deal. It's not like selling to a strategic acquire where you take 100% of the cash and you walk away. No, you're now a partner. And so you've got another 10 20 30 50% of the business still locked up with these guys. So at some point there is to be an exit. So when you sit down with the private equity firms, the primary questions you want to get out of the way right away are how would you intend to exit this business? Now if you're a lower middle market business doing 20 million in revenue, the chances of them taking you public are slim to none. So that's probably not an option. But if you've got a much bigger firm, that might be an opportunity. Either way, how do they intend to exit when right now on the onset do they think they would attempt to exit it? Well, of course, it depends on the fund life cycle and how much cash they've already committed amongst other things like economic conditions. But at least try to get a ballpark idea. Hey Gary, we think we're probably going to hold this 5 years or 3 years. try to understand that to make sure that there's alignment because you as a CEO might have certain goals to accomplish that might take you five years to do and if they want to do a quick exit that might complicate things for you. So you have to think about timeline to exit what are they going to how will they intend to exit, right? Will it be a sale to a strategic potentially another private equity firm? And I bring this up because if they think they might sell to another private equity firm, what's the chances of you having to go along for the ride? They hold you for two years. Bigger private equity firm comes in and says, "Hey, um, we want to buy this, but you know what? We need Gary to come along with us." A strategic acquirer might not require that, but potentially a private equity firm would. So it's important to understand okay what happens if that's the case and I don't want to do that. The other thing when I think about exits which comes up as a question to me all the time is who actually decides like who decides when's the exits going to be? Is it Gary? Is it the private equity firm? Well no at the end of the day it is the private equity firm unfortunately. I mean they're going to be the majority owner of that business. They're ultimately going to be able to pull the trigger. you would likely have dragalong rights, tag along rights, and of course, your investment banking team and your legal advisor will be able to explain to you how all of that sort of stuff works. But at the end of the day, it's a private equity firm that's going to drive this exit decision. So, even though they told you they might hold it for 5 years, I mean, if I think back to 2020, we all remember what happened to the capital markets in 2020 and 2021 when central banks around the world were printing all sorts of cash. The financial markets all went vertical. overnight. And so we saw a massive compression in how long private equity firms were holding businesses. Historically it was four to six years and all of a sudden 2021 and 22 came around and these guys were dumping these things because prices were just getting so frothy. And so there are economic conditions that can influence it. But at the end of the day it will be the private equity firm that makes that sort of decision. But I think it's important for you to ask that because you know I have seen certain circumstances where PE funds will come to the founder and say hey Gary there's a great opportunity for us to exit this now. Um do you have two more years in you because if you do we can make this acquisition we can build value here and then maybe we'll exit in the future or if you're not really into that maybe we'll just take the opportunity right now to exit. So, how much influence will you have on that decision? Are these the types of guys that are going to come and ask you about that or are they the kind of guys that you're going to wake up one day and they're going to say, "Hey, we hired a new investment bank and the business is on the market." Again, take what they have to say now and then cross reference it. You've got a handful of CEOs who've been through this, who have now exited with this very private equity firm. How did that go? How far in advance did they start talking to you about the ultimate exit? Was it six months? Was it a year? Or did you find out when the business was already on the market? What sort of participation did you have in the sale process? Were you going to bake off meetings with acquirers? Did they keep you in the background? Did you have any choice? So, was this purely a financial decision? the company was sold to the highest bidder or maybe you intervened a little bit and somebody was willing to pay a little bit less but you thought it was a much better cultural fit for the business. Did the PE guys listen to you? Now you might not care about that but there are some people out there who are not going to want their baby that they founded and partnered with a private equity firm and then all of a sudden now the private equity firm is turning around selling it to their archeneemy. Right? That might be you. And if that is you or potentially you, that's a really good decision to not only help up with the private equity firms, but also the band of former CEOs to see how they dealt with that. If you're considering a private equity transaction and you're like Gary, I encourage you to spend as much time as possible, much quality time understanding both the upside and the downside in math. So, you go out to a process, you deal with a bunch of private equity firms, they're making offers, they're bidding, so on and so forth. And again, you narrow it down. Now, you've got three PE funds that you really like. You want to get down to brass tax. You've asked them a bunch of questions. You've talked to the band of former CEOs, you're feeling good. You really want to drill down on what the economic terms look like and what's in it for you. Like for example, does your rollover equity have any sort of a ratchet in it? How much of the total company equity is being put aside into a employee management pool? Right? So let's say that a business is worth 100 million. Let's say it's got a $100 million equity value. Are we taking 10% of that? So 10 million of that 100 million and putting it aside and allowing management and maybe other key employees to have equity incentives, options, so on and so forth because of course that takes away from the private equity firm, takes away from you, but it also incentivizes the management team. What needs to happen in order for you to get your return? Again, we talked about are you investing Perry Boo into the same class of equities? Is there any sort of liquidation preference above you? Provided that's not the case, walk through the math. If I were you, I would want to know how is the private equity firm modeling this transaction. What sort of assumptions have they made? So, for example, they're going to look at your business right now and they're going to project it out for five in five years. This is the performance over the next five years. Here's organic growth. Here's what we'll do in acquisition. So on and so forth. Here's what the financial model looks like. What assumptions are they using? And what sort of numbers do you need to hit in order to get X, Y, and Z as a return? What happens on the upside? What happens on the downside? What happens if we don't perform? Can they ratchet away any of your rollover? Was there earnouts baked in there that you're not going to hit? there. The smorgus board of options is way too large for this discussion today. But understanding that and most private equity firms will sit down with you and be pretty transparent. Here's how we've modeled this out. Here's the portion of the business that you're going to own postclosing. Here's likely how you'll be diluted by financings, by subsequent acquisitions. Remember, when you go out and do deals, so you're the platform business, for example, you go out, you make acquisitions. Every time you do an acquisition, the private equity fund might allow that seller now to roll equity into your platform business. And so as that sort of stuff happens, you could be potentially diluted over time. Again, this is part for the course on these deals. It's typically nothing to worry about, but it can impact you. And so you can't go into this like Gary, which is like, oh, there's a couple buyers and we sit down and they took me to to a nice dinner. I'm going to do a deal. Blah blah. No, take control of this and understand it or get somebody on your side of the table that could help you understand it because it'll be important. You know, the issue I raise now obviously is largely if you're a platform acquisition. Um, in a perfect world, you'll be a platform acquisition and you'll be able to do add-on acquisitions and grow and exit the future. But the majority of us will be add-on acquisitions. And an add-on acquisition, as we discussed in the private equity survival guide, is exactly what it sounds like. It's an acquisition that adds on to the platform. And when I talk about fund size, I think fund size is important because let's say that you're a $50 million business and you are going to become a platform for a private equity fund. Well, if you're a platform for a $500 million fund, that's one thing. But if you're a small platform for a $2 billion fund, it's akin to if we imagine for a second Gary owns Breeze Airline, right? No one's ever heard of that. It's a real airline. But Gary owns Breeze Airlines and he's got two options. He can deal with middle market private equity fund. Uh that's going to make Breeze the platform and then go out and acquire a bunch of other small regional airlines under him. or Bigfund here wants to get into the airline industry and they're like, "You know what, Gary, we like you. We like your business. We want to buy Breeze Airline." Fine. Well, they buy Breeze Airline and then 3 months later, they get an opportunity to buy American Airlines and they've got the funds to do it. So, they now take American Airlines private. I can guarantee you they are not going to rebrand American Airlines. Breeze Airlines, right? If your business now will be American Airlines, whereas if you were Breeze Airlines for the smaller fund, they can't buy American Airlines, Breeze Airlines will likely stand as the platform. A lot of sellers are emotionally attached to their business and the name and so on and so forth, and they don't want these things touched. Well, you've got a much greater likelihood of h that happening is if you're a smaller platform in a much larger fund than being a larger platform in a smaller fund. So for advisers out there, you might be asking yourself, well Paul, when you're working with a Gary, how deep into the weeds do you actually get with diligence on each of these private equity firms? And that is a great question. I over time have tended to shy away from actually making the CEO calls or being on the CEO calls. So years ago, we used to do diligence on PE funds. I used to hop on a call with private equity fund. We would be with the client. We would ask a lot of the questions on the client's behalf and we still do that. But now when it's time to kind of do the cross referencing, I used to actually get on the call. So I would be with my client. We would be in the office or we might be on a conference call and we would call Joe Blow, right? Hey Joe, I saw you were part of Cedar Fort Capital for three years and you exited. And Joe's like, "Well, how'd you get my number? Did they get you my number?" No, we did some research and we found that Joe was a little bit surprised somebody would be checking that reference and Joe then would get an opportunity to talk to Gary and they would have a chitchat about what life was like at Cedar Fork. And what I realized over time is that the past references, especially when they had anything less than glowing, would say more when it was oneon-one with Gary, for example, the client, than with both Gary and myself on the phone. So over time, I just quit getting on those calls with former CEOs. I think it's a great opportunity for CEO at CEO to talk. They speak each other's language. They can ask a lot of those questions. Um, I I think it flows better and and I don't feel like they're as closed in uh the references when it's just one- on-one with the potential seller. Um, so my recommendation, you know, of course you can do that, but my recommendation would be let the client have those calls one-on-one. Of course, you though can drive the conversations with the private equity funds. Now, if a client is not outgoing and is a little bit timid asking those questions, sure, we should take a run at it. But the way that I do this is I make sure that the client has a smorgus board of questions. Here's the questions. Here's why you should con be concerned with this. Here's why you might want to ask this question. I provide that to the client. I get them thinking about it and I I actually like them to drive the questions because I find that actually quite frankly when Gary asks the question in his own words it's way easier for the private equity firm to respond in a way that he would understand. When I ask them they're talking to another finance guy and they're using Joe. But when Gary understands the questions and Gary can ask them himself directly to the principles of the private equity firm, they really try hard to speak his language. So I feel like it's much more effective if you get the Garas of the world or your clients to actually ask questions both to the private equity funds as well as to the reference points. Now I'll put a link below in the description and I'll put a sample question sheet. anyone can download that whether you're a potential seller or another advisor to look at what we provide clients. In addition to providing clients with questions, we've got to do the research, right? Like we've got the databases, we've got the research teams, we've got the analysts. So, they can dig in. I can give them, you know, 40 private equity funds. They can pull all the platform acquisitions. is they can calculate the add-on acquisitions using press release using databases using a lot of the stuff we have in house and they can provide the client kind of a full dossier on each private equity fund. Now we don't want to do it on a ton of them. We really want the client to get the feel. So we've got price and terms of course that's most important in a lot of ways but then also the client should get the right feel for the various different private equity funds. rebuild down the playing field. And I would say we do this on maybe the top five maximum on each deal process. And then the client can effectively look at all the deals that the private equity fund has done. They can look at who the former sellers were, the partners, did they stay around? So we try to go above and beyond and say, okay, uh, Cedar Fork Capital bought ABC company and ABC company was founded by Joe Smith. And so we see Joe Smith was the CEO for two years and then Randy Coleman is now the CEO. So what happened to Mr. Smith? Did he quit? Was he fired? Was he run out of t run out of dodge by the sheriff? We need to understand that. But it gives us a really good reason to talk to both Coleman as well as Smith, right? And we've got that on the document so that the client can see that. Um, so I really encourage you as an adviser to do the research and put your client in the best position because from the private equity funds and again I think most of these guys are straightforward and honest and a lot of them will everyone's got a \[ \_\_ \] show of a story right almost all of these guys have had some sort of busted transaction or they've retraded or something bad's happened a lot of them will say hey we're not proud of this but here talk to this guy like we could have done better and we learned from this and here's what we learned from it. Um, but I find that for the most part when you ask for references, you're going to get testimonials. So, in order to avoid that, you make sure you do as much research as possible so that you can of course talk to the testimonials, but you also want to talk to Joe Blow who's like, "Oh, how did you find me? I've been hiding under a rock." Like, the deal was a total disaster and I would never do it again. Hello. \>\> Hey, Joe. This is Gary calling. contemplating doing a deal with Cedar Fort Capital and I understand that you were a portfolio company at one point. You sold to them. Gary, Cedar Fort Capital, what are you talking about? Like cluster's more like it. Better watch your six, Gary. Those guys get me dirty. And you know, you're inevitably going to have those situations where Gary talks to Joe Blow and it was a unmitigated disaster. And what you'll realize is that Joe Blow was actually the Gary from the beginning of today's discussion. Like Joe Blow was approached by the private equity firm, did zero due diligence, had no idea what difference private equity firm A was from B. Looked at the headline number, didn't really assess the partner, got into bed with these guys, and then realized it wasn't what he thought it was going to be. And it wasn't because they lied to him. They were probably very honest with them. They were just speaking two very different languages. And when somebody's like, "Yeah, I am going to write you a check for $100 million, and by the way, you're going to roll $30 million into this new co, and I'm going to take this 30 million, and I'm going to turn it into another 100 million 5 years from now." And they're thinking about generational wealth and all the stuff they're going to buy. They get tunnel vision, and they forget about all the details that go into this thing to make day-to-day life actually worth living. They get focused on the big numbers. ly focused on courtside of the Bulls, the Vatch, and the this and the that. Um, so Joe Blow could very well have been Gary, and I think that's a great reference for this Gary as to what he shouldn't do, but he also needs to take things with a grain of salt. And I'm mentioning this because it's an important thing. Inevitably, there are portfolio companies, there are CEOs, founders that have had bad experiences, and it's actually not the private equity fund's fault. Or maybe it was their fault, but they learned a very valuable lesson, will never do that again. And so, you're an adviser. You're working really hard on a deal. You run this great process, huge numbers, and you're like, "Man, I am way better than I thought I was at this." And then the client does reference checks, everything's great. And then he talks to one guy who's like, "Oh, those guys are bastards. Don't do a deal with them." And he's like, "Oh, maybe I shouldn't do a deal with them." And you're like, "I just wasted a year of my life on this transaction. The seller screwed it up himself or there was a misunderstanding or the private equity firm did something wrong but learned and repented for their sins." This kind of stuff happens and and and that's the reason why I used to be on these calls in the early years is because like this sort of stuff happened and I wasn't on the call. I was like, "Shit, I should have been on that call. I could fix this." But over time, I I realized that it's better for me not to be on the call. It's better for Gary to hear from Joe Blow. And then when he brings all this stuff back, then you can sit down, the right thing to do is sit down with the partners at the private equity firm and say, "Hey, we had a call with Joe Blow and it was an unfortunate call. We heard a lot of things we didn't like." and give them the opportunity to explain because I do think that when I look at the private equity industry, I think that there are a lot of very very good firms out there that have investors that are vested in the success of this. They do great deals. They try to deal fairly and honestly with the people that they partner with and snafuss do happen. So you don't want to necessarily throw the baby out with the bath water. You know, another thing that I think is important for adviserss to keep in mind is that it's your job to inoculate your client from the psychological and emotional impact of the buyer courtship. And so I talked about this a little bit earlier in today's discussion, but you know, if we take Gary for example, Gary was whined and dined by Chris and John. They flew first class stakes at Gibson's courtsite at the Bulls. They flew him up to Chicago a half dozen times and they've invested a lot in him and you know they fawn over him, they adore him, they get him, right? And so for a lot of these business owners that are effectively toiling in the vineyard and then there's interest in them, there's interest in their company, it becomes very intoxicating. And you know, I've had clients say to me, well, you know, the guys at Cedar Fork Capital, you know, took me out to all these dinners and sports games and they spent a lot of money and you know, well, no \[ \_\_ \] That's their job. They're attempting to buy your business at a $30 million discount. And I would say the 25 grand that they spent on entertaining you is probably a great return on investment, right? I mean, clients often do not understand what's going on. They can't feel it. I mean, when John and Chris demonstrate to Gary how much they like him, I mean, Gary's naturally going to like them. And when they spend all of this money on Gary, he's automatically going to want to reciprocate. You know, I had a conversation with a client once who called me up because he ran into a um he ran into an issue on a deal. He was just like Gary. He got approached by private equity. He went out, met with a bunch of these different guys, and then um he started getting the sneaking suspicion that he was being underpaid for his business. So, let's say this is a $50 million firm. Uh, and he thought, well, maybe it's worth 75, but I'm not quite sure. And he had his own Chris and John that he was dealing with. They flew him here and there. They had dinner as like met the family. And at dinner one night, he sat down with him and said, "Hey, you know, I really like you guys, but you know, I only get one shot at this." And, you know, I'm I'm thinking about talking to an adviser. and they came back to him and said, "Hey, um, you could do that. Um, but number one, we'll pay you top dollar." And by the way, that statement in and of itself is impossible to disprove. I mean, by definition, it's true. They're going to pay him top dollar, whatever that is. Um, but they said, "Hey, you know, the boss man wouldn't really be happy with us, John and Chris, if he found out, you know, we spent all this money on you and really built this great relationship and we thought we had some sort of a deal and then you were going to bring an adviser on and the adviser just like shop us and find a different partner and so on and so forth." and he called me and he for weeks had a very hard time meeting with anyone else because he didn't want to cheat on John and Chris and these guys liked him. They spent time and money and effort on him. He didn't want to disappoint them. He had a natural inclination to reciprocate their generosity by doing the deal with them so that they would look good in front of their boss. It is a very intoxicating and very powerful psychological force that I see in play all the time. So, as an adviser, your job is to inoculate your clients. I don't care who's spending what money, taking them to whatever game, buying them whatever stakes and sushi. At the end of the day, the private equity firms or strategics, not just PE, but any sophisticated buyer will take this approach because they know that their worst enemy is competition. Right? Number one. Number two, the seller needs to like them. And number three, the seller will reciprocate, right? And it's not going to be kind for kind, right? If they spend a lot of money and take him to games and so on and so forth, he'll reciprocate that goodwill by not talking to another party, for example. And so it's again, it's it's very powerful. Sellers oftentimes don't realize that it's actually happening because they really do feel bad. I mean, this guy actually legitimately felt bad. These guys spent a lot of time, money, and effort on me. Whined me and died being now the boss is going to be upset with them. I couldn't do it. You know what? Could we really do better? Like, is there really a better deal out there for me? And what it did is it mentally closed off his mind from options, right? like, yeah, like I'm not particularly excited about this girl, but I've gone on a lot of dates with her and like, is there really a better option out there? And then you come from a mindset of scarcity. You close yourself off to optionality. And when you close yourself off to optionality, you don't have nearly as much resolve when you negotiate. So advisors, it's your job to explain to your client the dynamics of this. And I always say like every buyer out there, if you're out there and you want to buy a business yourself, you should watch what the sophisticated players are doing because they've had a tremendous amount of experience in what's works. And what works is you want to make sure that the seller believes that price is objective, right? No one else. There's a going rate and I'm paying top dollar. No one can do better. Um, I really love you. I'm the guy who really recognizes everything that you've done in your life, what we've built, how special you are. By the way, I want to take you here. I'm going to take you there. I'm gonna spend money on you and just show you how much I care about you. It becomes very difficult for sellers to look at other folks. So, that's a play that all buyers should use. And it's extremely detrimental to sellers if it's not counteracted. So, you as an adviser are an antidote to this. And how you do that is, of course, you stack the deck and you bring in a bunch of other buyers. And now when five or 10 different buyers are fawning over the seller and taking them to dinners and flying them places, well, now they're just one of the crew. They're not the only girl at the bar. So, the guy who called me wondering if he was leaving cash on the table and didn't want to offend the buyer ultimately ended up seriously offending and insulting the buyer. He ultimately engaged us. We took him out through a full process. His purchase price ended up being like a ridiculous like 20 or 30% more than what he had originally was ready to ink a deal for. And we attempted to bring that buyer into the process. They didn't even want to play. You know, they basically said, "List this is insulting. We spent so much time, money, and effort with this guy. He dragged us on and on, and now he goes out to process." And I can understand how they feel about that. But at the end of the day, that's what you need to do as a buyer, right? And so, you know, in a lot of these master classes, I tend to focus on emotions and psychology. And, you know, we can play around with Excel spreadsheets and weighted average cost of capital multiples all we want, but at the end of the day, it is really the psychology and the emotions behind this that drives these transactions. And this buyer was trying to effectively corail him into a one buyer auction, which is a losing proposition for the seller. And that was all done innocently and gently with the psychology of liking and reciprocity. For business owners out there, I think it's important to take a step back and look at the big picture here. Today, we talked a lot about some of the nuances and questions that you should ask a private equity firm. And while Gary should have done that, I think the most important mistake that Gary made is he didn't frame this up correctly in his own mind. If you were the one that actually had to sell the private equity firm, it wouldn't be them taking you out to dinner, flying you first class to Chicago, and taking you courtside at the polls. You would be the one doing that. And what that demonstrates is that you're actually the prize. You own the scarce asset. And there are a lot of them, right? I mean, literally, by definition, they have to come out and sell themselves to you. So, you need to take that information and realize that there's a plethora of these guys. It's their job to limit the playing field and narrow your vision to only look at them. If you ask none of the questions that we talked about today and can frame this the right way in your mind and have the private equity firms compete to invest in your business, you will be so far ahead of Gary, it won't even matter. And then you layer on the fact that you're educating yourself, you're starting to understand the nuances of how the different private equity firms operate differently from each other. And then you can think about what sort of private equity firm would be a good match for your personality and your goals. You can really put yourself into a position where a transaction could be a slam dunk for you. Here at PTOIC, we love to kill it for our clients. And I think that education is the cornerstone which allows our clients to make the best decisions for themselves. the more you can understand about the nuances of how strategic acquirers work, how the operations of private equity firms work and the psychology and the tactics of an M&A transaction, the better you're going to be when it comes time to pull the trigger. If you own a business and you're being contacted by strategic acquirers, search funds, private equity firms, and you're trying to size up what you might do, take a step back and give us a call. We'll help you forge a plan. Whether that exit is a year from now, five years from now, or 10 years from now, we'll help you think through a plan that is specifically tailored to your financial goals and objectives. So, please contact us directly. I've put a link to the contact form in the description of this video, and you can also contact me directly on LinkedIn. Again, you can click on the link below to download the questions you should ask private equity. This is a culmination of 20 plus years and billions of dollars in transaction with private equity. And these are the questions that I recommend clients ask private equity firms before they do a transaction. It's probably something you're not going to want to miss. Further, if you got value from this video, you're not going to want to miss what we have coming up here in the coming weeks. We'll be doing the valuation master class. We'll be kicking off the buy side M&A master class. And we've got a lot more to say private equity. and feel free to share this master class series with somebody who you think might benefit from it. Again, I'm Paul Jammore. Thank you for joining me today and I'll see you on the next one.