As a buyer, the more significant risks Black Lake Capital Managing Partner Charles Scripps works to avoid are concentration and transition risks. Concentration can include customer and vendor concentration, even concentration within the team of managers where those relationships lie. And when buying people-centered businesses, the relationship with the acquired team is central to success, so avoiding risks in this area is critical to a productive transition.
"It's pretty much the same for all businesses: It's the people and the relationships and transferring those that we're most concerned about," he said at the Denver Smart Business Dealmakers Conference. "So, is one person, when you meet with them, and you have that uncomfortable meeting where they can't stop talking, they talk over their people and it's clear that's their show? That's a very difficult business for us to invest in because when he decides he's cleared a bunch of money and he's going to leave, who's left?"
To counter that, he says owners who intend to sell their business should do everything they can to get themselves out of the job.
"Try to hire people around you that know what you do — they can do your job so that you are not the most important person in your business," he says. "And then my job is much easier because I can meet your team and I know that if you get hit by a bus, you're still in business there. That sometimes is hard to do, particularly in the service business."
Not only are they looking closely at how decision-making is distributed (or not), but also where are the relationships within the employee population and who do employees trust?
"Who's going to be the one that sells that private equity bought my business and it's not the end of the world, because it's not really a great thing to hear if you work at a company and now private equity is involved," Scripps says. "So, you need to have that guy on your side. And he needs to have those relationships within the company."
The aim, he says, is to try to remove himself and his firm from the equation as much as possible and provide the support needed for the leaders in the business to grow the company.
"For you as an owner, how does that change?" he says. "Our goal was, you come in on Monday morning and nothing has changed. We don't show up. We're not going to come in the conference room and bring everybody in and say, 'Surprise! Great news! You have some really sweet guy in a suit that now owns your business.' That is not helpful. So, our job is to listen to the founders of a business, listen to the owners of the business; they know better than we do. No matter how much work we do, they will always know better than we do. Where do you see the opportunities? And why haven't you gotten them? And what can I do to help you go get those opportunities — be it you need more cash, be it you need to hire more people, be it you need more time in your day so we can hire somebody else to do this stuff that you shouldn't be doing. But we are really just there to listen to where you think the best opportunities are. And let's go get it. So, it's our playbook, it's yours."
While PE can have plans for the companies they invest in, changes in the market may necessitate changes to those plans. So, he says what they're focused on is what they can control, such as putting the right butts in the right seats and giving them the incentives and the tools they need to be successful.
"And so, we're focused on the five-year work org chart," Scripps says. "And it's not that different than the five-year investment summary, but it's, where do we want to be? What people are we going to need to be successful? If we want to be in this market, who do we need to hire? How are we going to measure that success? And oh, by the way, what means we need to hire two guys to do that? And what means we need to cut bait and do something else?"
He says something sellers should keep in mind as they go through a sale process is that they and the buyer will soon be the same side of the table working towards the same goal, so they should be nice to each other.
"It's not about winning. It's about getting the deal together that you guys both are excited to be a part of," he says. "And if you aren't excited about spending some time in a foxhole with this guy, do a different deal. There's a lot of them out there; do a different one. And if you as a seller don't like that guy, don't tell him what he wants to hear. I don't know how many guys are out there look like me. Probably 500. You'll find another one."
