Jim Simpson with Finance 500 Inc.

Jim Simpson, Head of Investment Banking Group, Finance 500 Inc.

James ‘Jim’ Simpson is a financial advisor with Finance 500, Inc. with over 17 years of experience in private equity, investment banking, and legal and senior corporate management with entrepreneurial-stage companies. He served as the CEO of a start-up technology company – and was the advisor, investment banker, outsider investor, and director to over 25 entrepreneurial companies where he invested or raised over $500 million. In addition, Mr. Simpson, was the Brown Simpson Asset Management, LLC founding member. It is a private equity investment organization that focuses on domestic entrepreneurial-stage companies. It is based in New York.

Paola Trentadue: If you could give some brief overview of you and your firm?

Jim Simpson:  Absolutely. Finance 500 is based off of urban California. At this point, we have about 25 investment bankers that are part of the group. We are focused on the lower minimal market space. We define that as companies that have anywhere from $500,000 to about $7 million in 12 months. The group is comprised of specialists in a number of different industries and we’re built on the notion of collaboration. So, most of our bankers work and team up on each transaction that they work on and bring both the relationship management, as well as the industry specialization.

The firm’s been around since 1982. They have eight offices and 110 people in the firm. My mandate as the head of investment banking is to grow it to a full national practice and probably something on the 76 investment banker range, and have coverage in across the the United States and have full industry coverage – deep vertical expertise both within industries and product coverage.

Paola Trentadue:  Great. Can you tell us about the specific industries that you work with?

Jim Simpson: Right now, I would say we have a number of different specialists. We have everything from water, environmental services, semi-conductor, consumer products, manufacturing, community banks, aerospace, airlines, med tech, to bio tech. We have specialist in every single one insurance.

The key with us is that we are really built by operators. So, most of the investment bankers have not been necessarily investment bankers in their entire career. A lot of them have had deep operating experience.

I’ll give you an example. Our water specialist had 25 years of operating experience in the water industry as a chemical engineer. He had a key responsibility of a $100 million international segment of U.S. filter – most recently around the business development group Hentero, which is a multi dollar water company.

So, that gives you an example of type of deep industry expertise that we bring into trying to continue to grow in the group. We also have a five or six c group that’s coming on. It will be part of our broker dealer. We’re all very excited about that, as well – so, we can start to access this new form of capital formation that is coming to the market.

Paola Trentadue: I’d like to talk to you about a recently closed transactions.

Jim Simpson:  I can’t disclose names. I will give you a transaction that I’m familiar with because I want to participate as much more. It was a water company – a water treating company based in California. Probably in $3.5 million turn in 12 months – for very profitable companies probably 12 or 13 months top on.

The owner wanted to take a few dollars off the table; take care of their family; and make sure that they didn’t have all their eggs in one basket. The owner also wanted to grow the company over the next five years to exit at a much higher valuation than they are in more of that particular time.

So, we were able to identify that perfect institutional investor that came who had deep industry experience. This particular investor brought this petroleum engineer, who understood exactly what the business model and agreed with a great deal of appreciation of itself.

At a cultural level, it was a perfect fit for what they wanted to do. Our client was able to take off a sizeable amount of buying in to protect the family completely outside of the business. The company is doing extraordinarily well.

So, all farmers are very happy with what’s going on there. That was, in that case, is a majority of the capitalization. They came away with growth capital, so it’s in true recap. But most of the proceeds were out, and the company want it to continually have a good look on the back side of the transaction.

Paola Trentadue: Can you tell us about some of the other parties that were involved in the transactions and what their roles were?

Jim Simpson: In the normal transaction of this type, where you’re going to have the parties that sat with it – of course, you got a person at the issuer. And then you’re going to have the parties that are going to represent the investing parties.

On our side, of course, we have the accounting group and we would have even the senior bankers. When I say senior, I mean they’re banking the traditional bank. These are the folks that were in company prior to us – that was kind of core team on the issuer side.

On the investor side, this group brought in a third party transactions services group into quality earnings analysis that brought them into separate insurance – a kind of risk management group to evaluate their entire risk management. This company had some environmental services types of issues so we link those aspects to that.

We have an environmental services group to assess some quality of certain controls and procedures and quality assets that they were running because this is a heavy asset business. So, there were a number of different parts that we haven’t orchestrated and kind of quarterbacked through the entire thing. That kind of was making sense, right?

Paola Trentadue: Sure. How do you choose the people you bring in to work on a transaction?

Jim Simpson:  You have that great deal of trust and how the parties will handle themselves within the transaction; how they will complete their job, and do it without creating collateral challenges. So, we really need to understand the person, and people that are able to do that.

There are some great transactions services groups that really understand that – not only do they have to do the quantitative type of work, but they also have to assess the qualitative. They have to do it in a way that is additive from a cultural standpoint and consistent with the prime equity group – that is a contemplating company into the transaction.

 So, you quickly know what good people and some of the people who can kind of get in the way of this types of delicate discussions and delicate examinations of the business.

The interesting thing that we’ve go to deal with was that it really wasn’t the investor or an owner. There were some challenging issues around the dedication. It has have to do with some property, and some environmental concerns around the company. It’s always water treatment and plants, so you have obvious concerns. What turned out to be one of the bigger challenges we had to get creative on was that because the, it is a majority recap that the owner who had or the senior line that was already in the company had a personal guarantee with the owner. That’s very normal customers from a very small companies.

But now that it contemplated with the investors were gonna own a significant portion of this company, it no longer makes sense or is appropriate to have a personal guarantee with the senior liner. The owner shouldn’t take that type of risk because for obvious reasons. So, having to deal with that and having to ultimately replace the senior line became an additional wrinkle in the transaction that actually is more challenging that we expect it. We ultimately resolved it, but it had at another level of complexity that we did not anticipate out of the game.

Paola Trentadue: Are there any interesting takeaways or any lessons or one from this deal?

Jim Simpson: As an investment banker,  what I learned from this deal was – again, this is kind of commonsensical – it was much better to have a more negotiated LOI around the game and hit deals with every aspect of the SPA and it doesn’t leave as much for discussion later on…allows you to avoid as much as possible returning on the transaction and, the QLEs are gonna probably result in some challenges on that front.

But you’re not going to have legal issues that are gonna challenge you on that front so, we went from kind of your normal customer LOI and out to a 17-page LOI-  and we really dealt with the issues right upfront in the center and we didn’t want to have any uncertainties or to mitigate for these uncertainties as we got closer to the transaction.

Richard Baum, Managing Partner of Consumer Growth Partners

Richard Baum

Fundology: Hi, we’re here with Richard Baum. He’s the managing partner with Consumer Growth Partners. Richard, if you can please briefly introduce your company and what you focus on?

Richard:  My company is Consumer Growth Partners, which you mentioned. We are an independent sponsor. We focus exclusively on investing in retail companies and in branded consumer products companies.

Fundology:  I’d like to talk about the recently closed transaction today. If you could give us a brief overview of the deal you’ve worked on.

Richard:   Sure.  So we recently closed the transaction of a consumer products company. The company was about 10 years old, and it was founded by father and son. The transaction was for the son to be able to buyout his father, who was the majority owner of the company. The way we got involved is through a partner in a large fund where this company had been a relatively small piece of their portfolio. The fund was winding down and the partner, who had the relationship, wanted to be able to help the son put together a transaction which he could buyout his father.

The problem was that the funded partner really didn’t have an independent access to capital. Having existed in the fund for a number of years, he would simply, under normal circumstances, call up his chief financial officer and have him call the limited partners to send their checks. This is a much smaller deal than that. He really didn’t have access to, or knowledge of a lot of the types of investors and the size of investors that would be appropriate for this transaction.

So we were introduced to him through a mutual investment banker firm. Has a firm who could help him with his transaction. We met, we discussed the company. The company generally met our investment criteria, so we liked that. Together with him, we then went and visited the company, met the management, liked what we saw, kicked the tires. Explained to them how we would approach the transaction in terms of process that we would run, and who are some of the types of investors that we would approach.

The private equity partner, if you will, wanted to see what would be the arrangement if we were to partner together. We’re pretty collaborative and it wasn’t a deal that we found. We worked out with him that we would split everything 50/50, right down the middle. So closing fee, annual advisory fee, and then the back-end promote. Consumer Growth Partners, we get 50%, and he would get 50%, which frankly was more than I think he was expecting as to give up. We said, “You’re going to have to work for your 50%.”

From start to finish, the transaction took us about 6 months, which was really pretty good. Particularly because it was a complex transaction including the buyout of his fund. We still have his minority interest. It required a creative financial solution, so that the son could wind up … Son who had no money, except what he was rolling over into the transaction, still wanted to wind up in the control position. We were able to structure a deal in which that happened.

Our new partner, if you will, is now … He’s the board member. We do not have a board chief we have what’s called the observation ranks. We head every single board meeting. It was great working with him. We helped him out of a pretty serious situation that he was hoping to get resolved. The bottom line is that the company is very happy because that transaction happened. The son is running the business, doing a great job. Our partner obviously got his deal done, got paid.

We got another portfolio company that we’re really excited about. We actually, we have told our former private equity funding guy that if he finds another deal, we would love to partner with him.

Fundology:  That’s great. You talked about the complexity of this transaction. What was the most challenging aspect for you?

Richard:  The most challenging aspect was the fact that we were presented with the situation where the son only had a certain amount of capital that he was rolling over, and that was going to become the equity of the company. For him to be able to retain control, we needed to bring less than what he was rolling over. For example, if he was rolling $4 million, we couldn’t bring any more than $4 million of equity, because he wouldn’t control the company.

But the amount of money that we’re going to bring on the equity side would not have been enough to buyout his father. We needed to add some debt to the business in order to get it to the required amount, and so we ended up bringing as our investors to SBICs, which is small business investment companies, which is part of a government program that are able to do accommodation of equity and debt in every transaction.

So we didn’t have to go out and get a separate funding source. We were able to do the whole thing with 2 SBICs who put in the total amount. It was about 25% equity, and 75% debt. A fairly complex situation for which we found a simple and elegant solution.

Fundology:  That’s wonderful. And now, Richard, I have one last question for you. Are there any lessons learned from this transaction?

Richard:  There are plenty of lessons learned. One is you got to think you have to be … As an independent sponsor, you have to really be open to being very collaborative. If deals come to you not in the normal course of events or things that fit your profile, you should think about reasons how to get them done, not reasons not how to get them done. One of the other important lessons that we learned is that we have to be really patient with these complicated deals, because there’s a lot of parties involved.

In this case we had the son who had his own agenda. We had the father who had his agenda. We had the minority partner who was the fund, who had their agenda. We had to figure out a solution that really worked for everybody. It took a lot of negotiating back and forth. It took a lot of patience. In our world, we like to say, “If a deal doesn’t die 3 times, it’s not a good deal.” We went through this near-death experience more than once in this transaction. There’s different parties who weren’t quite getting what they wanted. They want to walk away from the deal. We can, if we’re always having to make sure that we get people back to the table and eventually get it over to finish line.

Fundology:   Great. Richard, thank you so much for taking the time to sit down and talk with us today.

Richard:  You’re welcome. Thank you.

Christopher Roden With C3 Capital

Christopher Roden

Fundology:  Hi, we’re here today speaking with Christopher Roden. He is the managing director of C3 Capital. Chris, if you could talk to us please about a recent transaction you’ve closed.

Chris: Sure, we covered some of it yesterday. It’s a really unique company in Grand Junction, Colorado that operates a global business. It’s called Reynolds Polymer Technology. They are the world-wide leader in the design, construction, and manufacture of acrylic sheet. And let me tell you what that means a little bit so you know a little bit what that is.

Fundology:  Sure.

Chris: It is made from monomer and polymer and the design and engineering of making thickness out of, basically, acrylic and plastic. The company started about 32 years ago in New Port Beach making windows for submarines for the U.S. Navy. They now expanded the business. Of the 1,682 aquariums on the globe, they’ve built 1,500 of them. They’ve built every Apple store you’ve ever been in. They have a lot of defense uses for their product, a lot of commercial uses. If you’ve ever been on a Disney ship, have been in the slides or the tubes, that’s their product as well.

Fundology:  Wow.

Chris: Global business, they have a manufacturing and distribution facility in Thailand as well, started by a wonderful entrepreneur named Roger Reynolds. And we worked with him to acquire a controlling interest in the company last year.

Fundology:  Great. And how is this deal sourced?

Chris: You know it’s an interesting story, rather unique. And at C3 Capital, we’ve done 60 investments these past 12 years, always working closely with entrepreneurs. Every now and then we work with the independent sponsoring community. In this case in Scottsdale, there’s a company called Cactus Capital that basically, after a speaking engagement, they asked me if I had a minute. I said, “Sure.” And they said, “We have this interesting deal in Colorado we can’t get anybody to look at.” And I said, “I’ll take a look.” And it’s a complex investment to look at given some of the accounting used. It’s a percentage of the completion accounting, its project work, and it’s a global business with assets outside of the United States, which precludes a lot of people from wanting to take the time to look at it. Our experience both in the U.S. and abroad, and our experience over the years led us to dig in a little bit. As a matter of fact I met with the-. The deal was brought to me on Tuesday and Roger Reynolds was leaving for Thailand on Thursday so I flew up there on Wednesday.

Fundology:  Wow.

Chris: Able to meet him and it’s really a company that shows very well. And when you see it you understand it. To look at it on a piece of paper, just discuss the financial engineering, you’re not going to get the full picture. And like I said, when you’re us and you’re out there meeting with the entrepreneurs, getting a little touch-feel of the product, and what the customers are like, it starts to come together for you.

Fundology:  And can you talk to us about other parties involved in this transaction and what their roles were.

Chris: Dan Mahoney, they brought in from Cactus Capital as independent sponsors, brought the deal to us, helped significantly with the due diligence process. And, as I said, not you’re run of the mill type company to quickly understand. You have to roll up your sleeves a little bit. And we did and we had an experienced due diligence team in Kansas City. And more importantly a very well qualified management team on the ground in Grand Junction. They understood what they wanted to do. They were very helpful and very eager for the transaction, because it’s a growth business. And really that’s what we do at C3. We invest in growth businesses. And it was just a good team. It was a very good experience and we moved through the process very quickly.

Fundology:  Great. What would you say was the most challenging aspect?

Chris: It does have a far operation. So, while we at C3 can understand that and deal with it a lot of the typical financing sources, i.e. banks in the country would just as soon not do that. And when you add a certain percentage of assets or income or coming from an overseas operation, basically they tend to discount that a little bit. And that’s a little unfair, at least in my opinion.

Fundology: Sure.

Chris: That made it a little complex. And also, the percentage of completion accounting that is used in the business as in any project finance type of operation requires a little work and a little bit more understanding. And it creates a longer work and capital cycle, which you have to get your mind around. And lucky for us my colleagues at C3, we had the experience to do that. So interesting parts of that deal would lead to the understanding of those aspects. And of course the Thailand operation as well. I would say they were the most challenging parts.

Fundology: And can you talk to us about the differences between the Thailand operation and, maybe, a company operating in the United States?

Chris:  Sure. It’s interesting, because it’s an evolutionary process. I think that when most investors or buyers in the United States look at Asian operations, they think of producing commodity product, i.e. very little value add, low cost labor, widget making, so to speak. It’s true, the bulk of the engineering and design expertise at a company like Reynolds is in Grand Junction. And it is true that the Thai operation was started as basically a production of what we call commodity acrylic sheet. But also at the same time the world gets a little smaller in that there is a knowledge transfer going on. Asia is a very large market for the company. As I said, it is a global business. And I think when you look where population growth is and where the future sale of the product is going to be, it’s probably not going to be so much in the U.S. I mean you’ll always have good business here, but it’s going to be in Asia, to a certain extent South America, Eastern Europe. So I think you can’t look at it as having one aspect of production here and one there. It kind of grows into one.

Fundology:  Interesting.

Chris: So to speak, so there has been knowledge and expertise over to the Thai operation. Which I think creates a stronger company, and with greater enterprise value added to it.

Fundology: Definitely. That’s a very interesting insight, Chris.

Chris:  Thanks, no worries.

Fundology:  Thank you. Well, I appreciate you sitting down and talking with us today.

Chris:  My pleasure, thanks for having me. I’m happy to be here.

Jerry Mills, CEO of B2B Exit and B2B CFO, Author of The Exit Strategy Handbook

Jerry Mills

Jerry Mills founded B2B CFO, the nation’s largest CFO firm, in 1987 and is considered a pioneer in the CFO Services industry. Mills was recently named an AM&AA Thought Leader of the Year finalist for his book, The Exit Strategy Handbook. Jerry also founded B2B Exit, providing exit tools and talent to assist in exiting your business.

Fundology: Jerry, can you please give us a brief introduction, and tell us what drew you to the space.
Mills: Yes, well first let me tell you just briefly about myself. I started my career with Arthur Andersen. I was a manager. I saw this void in the space, and I just started this business in 1987, and we now have professionals in my company in 45 states around the country. So here we are.

Fundology: You’re an expert on business exiting. What is the most important thing that a business owner should do to successfully exit the company?
Mills: Well my experience in over a quarter of a century is that most business owners don’t understand that it’s harder to sell a business than it is to build it. They’re really good at building, and they haven’t had the experience of selling it. And when they decide to sell it, they typically don’t know the right price, and they don’t know the process. So what we try to do is teach them the process because if they take their eyes off of running the company, typically sales, and also the value of the company, whatever the value is, goes down. And so what we find is they’re just really good at building businesses, they don’t know how to sell it properly. And that’s what we help with.

Fundology: When you’re advising a company that is planning an exit, do you do all of the work yourself? Do you bring a team in to work with you?
Mills: No, we don’t do the work ourselves. We advise the business owner against that. That’s one of the hallmarks of The Exit Strategy Handbook, and also the software that we’ve written for this process. We felt that the business owner needs a team. The business owner needs to be in charge, and that’s why with our software they can look at the process every day if they want to, to see where it is. But we want a team. We call it the success team. We want typically an M&A firm or investment banker. We want an attorney that the owner trusts. We want tax CPA’s so they can calculate the after-tax money. We want certified valuation appraisals and so forth. Usually we recommend there’s about eight to ten people on that team that work in congruence with the business owner in helping support them. We believe in the team concept because there’s so many good professionals, and they need to use their skill set to help further the goals of the business owner.

Fundology: And how do you select those team members?
Mills: Well, business owners are interesting. They typically have some people that they already know, maybe an attorney, maybe a CPA for the taxes or audit, and so they have relationships, and typically they like keeping those relationships. But if they don’t have other relationships; for example, an M&A firm, an investment banker, or if they need some other advisers — we’ve been doing this for a long time, and we just have those relationships. We typically — when we introduce a professional to the business owner, we ask them to interview two or three different people because the personality has to fit as well as the skill set. They have to get along, and not only with the business owner, but with the team. So we will make recommendations, and then hopefully, by going through that process, we can build a cohesive team. And simultaneously, we can let the business owner keep doing what he or she is doing, get out of the process, and just go build the value of the company.

Fundology: Can you tell us about a unique situation that you’ve worked on, advising a company?
Mills: Well, there have been so many. We had one in our firm recently where we were going through this process. It was a female-owned business, very successful. And she was married, and she passed away suddenly. And so her husband then was given the role to step in her shoes to go through this exit strategy process. And he fortunately, we think, inherited the values his wife had. She didn’t take the top bid. She went with a lower bid because the lower bid had the values of taking care of her employees. And so you never know when you’re working in a situation. What we want to do is work together with our professionals and the team to carry out the goals and missions of the business owners. So that’s a unique situation, but overall, it may not be that unique.

Andrew Greenberg – CEO of GF Data Resources

Andrew Greenberg

Fundology: Please give us a brief overview of you and your company.

Greenberg: Sure, I’d be happy to do that.  GF Data collects valuation, volume, leverage, and legal term information on deals done by private equity groups on transactions they complete in the 10 to 250 million dollar value range.  Our data contributors get access to our information at no charge, and we then have a group of paid subscribers.  That includes M&A firms, valuators, lenders, law firms, corporate development groups and others.

Fundology: Is there an industry focus?

Greenberg: There really isn’t.  Most of our data is concentrated in four industry groups, manufacturing, business services, health care services, and distribution.  So we tend to get information from key funds that are active in one or all of those industry areas.  And then our customers tend to be investment bankers or other financial professionals working with clients in those fields.

Fundology: How are your clients using this data?

Greenberg: I think our greatest contribution has been introducing a sense of reality to the valuation of lower middle market companies.  When we first started the business, our average multiples were in the range of 6 to 6 1/2 times EBITDA.  And people said, “Well, that can’t be right.”  Because the scuttlebutt in the industry was always ahead of that.  Well, we now have 200 data contributors.  A thousand financial professionals use our product.  We have over 1,600 deals in our database, so the volume of information is kind of incontrovertible.  I think what our data shows is that the market for the valuation of lower middle market companies tends to be fairly disciplined, not the prices advanced by investment bankers, not the prices of the letter of intent stage, not the price that gets talked about in industry circles, but the price at which the deal gets done tends to be pretty disciplined.  You know, 6 to 6 1/2 times is a good average in the 10 to 50 million dollar value range.  And the fact is, it takes a fairly strong and special business to command a valuation of 7 times or more.

Fundology: Can you give us a use case or an example of how a company has used your data reports to add value to a transaction?

Greenberg: Well, as I said, we have a thousand professionals who use our data.  My partner, Graeme Frazier, and I are both deal professionals in our day-lives aside from running GF Data.  And I can tell you that at my firm, Fairmount Partners, we use the information all the time, typically at the pitch stage.  If we’re going to be in a business competitive situation, it’s invaluable to have the GF data reports and a centrical database which enables us to drill in and get valuations, cost in particular industry areas.

How we use that data is always a tactical question.  If a customer of ours knows that they’re going to be talking about valuation in a competitive setting, they might not want to be the ones saying, “Look, your business is valued at 5 to 6 times,” if less informed competitors are going to be coming in with loftier forecasts.  But you might as well have the right information and then be able to use your tactical judgment of how you use it.

Fundology: Can you give us just a brief overview of what you see as your vision for GF Data Resources?

Greenberg: Well, I think we’ll continue to do what we do, which is provide a practitioner’s view of the best available information that can be collected for financial professionals and buyers of businesses.  The big picture vision for GF Data has to do with looking at it in another way.  Our business also can be seen as an online based utility for hard to reach financial professionals geared to provide information in a secure environment, and then others go to collect that information.  We think that that gives us the ability to continue to develop applications that take advantage of our practitioner’s view of the world, and the trust that we think our system has built up over the past seven years.

Peter Worrell – Managing Director of Bigelow LLC

Peter Worrell

Fundology: Can you please give us some background on you and your firm?

Worrell: The firm was founded in the 1930’s by Nathaniel Bigelow.  We’re an M&A firm with a specialty in entrepreneur, older managers, exclusively.  So we work only with people who have their own capital at risk.  We’re what we call sell-side only, M&A firm.  So we don’t do anything else, no raising capital, and no real work on the buy-side.  And we work agnostically as to industry, and we work all over the country.

Fundology: I want to talk a little bit about your book.  You say that selling one’s enterprise is a creative art form.  Can you touch on that?

Worrell: Sure, well these are people, as we just mentioned, who have their capital at risk in an entity that they might have founded, or it might be a family entity that their family’s owned for a long time.  Or it could be an entity that they own with some institutional investors.  But in any one of those three cases, it’s something that usually their personal identity, their sense of self worth, is all tied up in this entity, along with their financial outcome.  And so, we think of it, Paola, in a way of speaking about it, as what we’re trying to do is help them to acquire the next majority owner for their business.  An owner that will sustain the business beyond their personal ownership of it so far.

Fundology: What can a business owner do to leave a positive legacy after an exit?

Worrell: Business owners frequently have a great, positive impact on all the stakeholders around them.  Perhaps more than they even frequently know.  Many times they have hired many of the people in their management team and in the firm.  Many times those people have spouses and families and talk about business together a lot.  Those people provide, hopefully, a great work ethic and a great outcome for the families who work with them.  But also, if I name to you a couple of names of families, let me ask you to guess what these names represent.  If I said to you, Gates, Buffett, Rockefeller, Lilly, Hewlett, Packard, Johnson.  What would you guess those names are?

Fundology: Technology or innovation.

Worrell: Great entrepreneurs, right?

Fundology: Sure.

Worrell: And of course they are.  But they’re also among the ten largest charitable foundations in the world.  So you see, those entrepreneur owner/managers created organizations, yes.  And they created great enterprise value, yes.  But to the largest extent that enterprise value went to fund the not-for-profit social sector in North America.  That’s what I mean by a great outcome.

Fundology: I also want to talk about a recent transaction that you’ve worked on. Can you please briefly tell us about an interesting transaction?

Worrell: Sure.  One of the transactions recently was a company in the industrial filtration business.  This is a company that makes water filtration for industrial processes, really large filtration equipment.  So it’s as large as this room.  And the company was started 30 years ago by an Englishman who worked in a number of process industries, and realized, wow, a lot of these industries have a constraint of either not being able to get enough water or they’re concerned about releasing dirty water back into the environment.  So he designed, with his team, a way to have industrial water filtration, both the equipment and also the filtration.  We were able to structure a negotiation that allowed him to choose from the best handful of strategic acquirers in the world, and the best handful of prime-equity investors in the world.  He ultimately decided to choose a private-equity investor, a firm from Los Angeles, who had great interest in the industrial filtration area.  In fact, had an operating partner who really was familiar with that area.  That transaction closed about six months ago, and I just spoke to my friend, Barry, who’s delighted with the outcome and couldn’t be happier about the future of the business.

Fundology: And can you tell us about some of the parties that were involved in this transaction, and how you were able to work together?

Worrell: Yeah, there were a lot of them.  We were initially referred to the business by its commercial banker.  The commercial banker had been the commercial banker for the company for a really long time.  I think it was one of those situations where the banker’s having a beer with the owner one night, and the owner said, “Boy, I don’t know what I’m going to do about this business.  Someday, I’d really like to think about who’s going to be the next owner.”  In addition, he had another concern, which is, he has a 32-year-old learning-disabled son, who he wants to provide for for the rest of his life.  In the back of his mind he was thinking, “Wow, I’d really better get some chips off the table someday.”

We were able to help him find an M&A attorney, who is from a world-class firm.  This one happens to be on the east coast, and we were able to help him work with also an accounting and tax advisor, and ultimately a wealth advisor, to help he and his wife and their son, develop some estate planning devices that allowed them to put the enterprise value to great use.

Fundology: And how do you choose the team that you work with?

Worrell: That’s a great question.  We used to — back in the bad old days, be very cautious, be very careful about clients because, of course, all of our clients already have a lawyer.  They already have an accountant.  They have these advisors, but it’s not typical that these advisors are expert in these large M&A transactions.  So we have, over the years, become more bold to say to our prospective clients before we get engaged, “Hey, let’s talk about the team.  Let’s talk about the team that’s going to surround you as the entrepreneur, owner/manager in the middle.”  And let’s talk about, for example, do we need to have a great entity deal tax person?  We had one in this case.  She was a person who was a partner in a national firm, who was able to clarify so many things so quickly for us.  It was just of great value.

Or let’s think about who your wealth advisor is.  An armament of some things that can be done in advance of the transaction to help you along the way.  So we are now quite forward about making sure that our clients have thought about these advisors in advance.

Fundology: What was the most challenging aspect of this transaction?

Worrell: It fell apart.  On the Sunday after Thanksgiving, I got a call from the CEO of the strategic investor that we had originally picked.  They said, “Pete, I’m awfully sorry to give you this phone call, but we’re not going to make our quarterly profits.  And you probably know, it’s my first year as CEO.  And the reason we’re not going to make our profit number is because of an acquisition we made last year.  And I know we’re supposed to do this transaction, and I’m so sorry, but there’s no way I’m going to bet my career on telling our board that I’m going to go forward with this transaction, when I really need to get my act together and clean up this old one. “  So our team swung into action on that Sunday afternoon.  We had a firm-wide meeting at Bigelow, and we asked ourselves, what are we going to do?  How are we going to go back to the market and think about who can step into the shoes of this investor?

The most challenging thing was to really pull that back together very quickly when we were only two weeks away from closing.  And to be able to do a transaction, that I think if you asked the owner, he’d tell you, he’s as happy with, and some ways more happy than probably he was with the first one.

Fundology: How did you source that private investor?

Worrell: This was a private-equity firm in Los Angeles, that I mentioned.  And we had had a number of dialogues with them over the years about what specifically vertical industries they were interested in, and one of them was filtration.  I have a partner who lives in Seattle.  His firm’s in Los Angeles.  And he said, “You know, I remember that Rich told me that he was always interested in industrial filtration.  I’m just going to pick up the phone and call him.”  Because this is such an unusual situation where Humpty Dumpty fell off the wall and went into a 1,000 pieces.  And what we were basically saying was, if you would like to step into the shoes of the investor who fell off the wall, the deal is almost all negotiated.  So really, if you’re willing to step into the shoes, we can do this very quickly and with very little competition for you, which we were able to do.

Fundology: Are there any interesting take-aways or any lessons learned from this deal?

Worrell: Yeah, I think there’s a couple.  I think probably one of the things we didn’t do as well as we could have was, we didn’t prep our client’s management team as well as we could have, and how challenging it’s going to be to explain the business to a private-equity investor, totally skillful, qualified, experienced private-equity investor, who wasn’t from the industry.  So we probably could have done a better job on that, and we’ll do a better job on that in the future.

I think the other thing was probably that this client made a decision that he wanted to find a new majority owner pretty quickly.  And as you may know, in our practice we frequently have months or years in advance of a transaction where we are working with our owner/manager clients to kind of help them build value along the way.  That’s the other thing we should have done here because there’s a few things, not just window dressing, a few substantial things we could have done that probably would have made the business evaluate better.

Fundology: What do you think those things were?

Worrell: Oh, I think they had to do with, for example, when you look at the business — if you look at the business with me, you would agree that they were thin in their marketing channels and their sales management.  And the reason is because the owner/manager was so powerful in selling.  He knew the technology.  He knew the customers so well.  But when he made a decision to transition out, that was quite obviously going to be a hole.  And it’s a hole that the private-equity firm can and will fill.  But it could have been a hole that he could have filled in advance, and probably could have realized additional enterprise value for that.

Joe Donlan – President of ConnectedHealth

Joe Donlan 0 ConnectedHealth

ConnectedHealth provides the leading benefits shopping platform that offers consumers an integrated marketplace for health and financial protection. They offer decision-making tools, such as a recommendation engine, to help make health plan choices easier. Joe Donlan is the President of ConnectedHealth. Prior to ConnectedHealth, Joe was a co-founder of Subimo, a recognized market leader in consumer-driven health care.

Fundology: Please tell us about Connected Health.
Donlan: Myself and a colleague, John Fiacco, started the business a few years ago. We’re a Chicago-based company. We have offices here in Lincoln Park/Bucktown area with several employees scattered throughout the country. Our focus is to become the premier consumer marketing organization that allows businesses to grow their business while ensuring that their employees are healthy and financially secure. What’s happened over the last 15 years or so is that health care costs have been going through the roof. That’s had a negative impact, of course, on businesses’ bottom lines.

As we all know, in order for a business to be competitive, they need to offer a compelling benefits package to acquire and retain key talent. We also know that when employees do have the appropriate insurance coverages, they tend to be healthier. They tend to be more productive in the workplace. Our opportunity and really our ability to solve for this is in the centered around creating a consumer-focused e-commerce benefits platform. We’ve developed a product which we call a Smart Choices Marketplace.

The Marketplace accomplishes two main things. First, it allows employers to have more predictability in their healthcare costs. We leverage an approach called defined contribution. Really what that means is employers will allocate a certain amount of money that employees can use to apply or purchase health insurance and other related benefits. The other part of that is that employees no longer want to settle for a one-size-fits-all approach. Offering one or two benefit options really is a thing of the past.

What we’ve done is amass the Marketplace so that employees have multiple benefit options whether it’s medical plans, dental plans, vision, you name it, we provide the marketplace, the employer provides the dollars, we make it easy for them to shop and buy those products. We deploy the Smart Choices Marketplace either directly to employers or through trusted advisors or third parties such as payroll companies, health plans or consultants.

Fundology: Is there a focus on the size of companies that would be using the platform?
Donlan: That’s a good question. Not necessarily. The platform can accommodate benefit strategies for all size customers. We have organizations that have 100,000 part-time employees, as an example, that’s using and leveraging our platform to help those employees get coverage. We have some employers that have under 25 employees. It really runs the gamut in terms of how and the value that the product can be provided to an employer.

Fundology: Have you seen any challenges building out a marketplace model?
Donlan: Certainly. I think what’s happened over the last 12-13 years, everything takes a really long time in healthcare to play out. Myself and my colleagues had started another business back in 2000 where we were offering consumer decisions support tools to individuals. We talked a lot about consumerism and health and wealth but the reality of it was the market wasn’t necessarily ready. We’re seeing a very big shift from the wholesale marketplace to a retail marketplace.

What that’s allowed for is more willingness from the different carriers to think a bit differently about their distribution strategies. Connected Health provides a very compelling distribution strategy for these organizations that want to make sure they’re offering products where people want to buy.

Fundology: Can you tell us how you you’re working with the recent changes in healthcare laws?
Donlan: We never predicated the business on health reform. We kind of started it when health reform was percolating. What we did was predicated our business on the fact that employers are still being challenged with healthcare costs. They need to offer compelling benefits packages to get the right people to make sure the business is successful but what’s happened with health reform has helped accelerate our business.

The notion of private exchanges or private marketplaces has really accelerated as an alternative or viable option to the public-run exchanges, because in our mind we think that the employer still is an important and critical gateway to offer benefit coverages for a whole host of reasons. When an employer has the ability to control that approach and process, there’s a lot of value that they can get out of it in terms of the packages that the employees can get benefit from.

Fundology: Tell us what your plans are for Connected Health in the future.
Donlan: We’re very bullish, certainly, on the market. There’s a lot of studies and data that are coming out as of late about how private exchanges really are the next wave in transformation in healthcare and in benefits. We feel as an organization that, based on our knowledge of how consumers make decisions, and this is difficult because we’re talking about instead of one benefit option, someone might have 10 different benefit options. It’s really important for us to leverage our experience and understanding how consumers make decisions, how to put it in a framework so that it makes it easy for them.

We spent a lot of time developing out the recommendation engine that will provide personalized benefit results for an individual. Today we’re providing those personalized benefit options for somebody but we’ll continue to listen to our customers, understanding what they’re looking for. We’ll expand upon that to start rounding out this full concept around health and financial security portfolio.

Larry Baker of Bolstr

Larry Baker

Bolstr is a fundraising tool for small, brick-and-mortar businesses. Their crowdfunding platform enables small businesses to reach out to their networks and communities to raise smaller investments from a larger group of people. Larry Baker is the co-founder of Bolstr. Baker left his career in finance to tackle common issues in raising capital for small businesses.

Fundology: Tell us about Bolstr.
Baker: Bolstr is a web-based marketplace that allows accredited investors to invest in local businesses; more traditional brick-and-mortar type opportunities like the craft beer brewery down the street, or a coffee roaster or a CrossFit gym. We’re really looking for exciting opportunities that we can put in front of accredited investors to give them the opportunity to invest in and support their local communities.

Fundology: What drove you to create this company?
Baker: It was really just the lack of access to capital for some of the more interesting, higher growth small businesses out there. We were looking at the marketplace, it’s very challenging to access funding. If you are more of a traditional-looking business that’s generating cash flow and can scale up, venture capitalists and private equity firms are really looking into this sector. It’s really tough to try to get in front of angel investors because they’re primarily focused on that high-tech company who can boost their return. We saw a really cool opportunity to open up a new capital marketplace, give private investors the opportunity to see interesting opportunities so that they are able to earn higher yields in their local geographic communities.

Fundology: How are you providing value for these small businesses?
Baker: On our platform, accredited investors can sign up and they’ll be able to see investment opportunities around them. We created a custom agreement to facilitate the investment into these businesses, called a revenue share agreement so the business shares a percentage of their top-line sales with investors until they achieve certain multiple on their investment.

That provides liquidity to investors so you’re not waiting for the 5-year exit liquidity event like you would with an equity round of a high-tech company. Here, you actually receive monthly revenue-based payouts on your investment until you achieve a certain pre-determined multiple on that. We’re able to show high-yielding, early-stage investment opportunities to private investors which in turn allows these companies to be able to access funding which allows them to grow their businesses.

Fundology: Can you tell us how the process would work on the investor side?
Baker: Investors can go to Bolstr.com and create an account where once they certify that they are in fact accredited, they will have access to review investment opportunities on the Bolstr platform. So it’s a fairly easy process from there, there’s no cost to join, you’ll be able to sift through different opportunities and it’s an invest on an opportunity-by-opportunity basis. There’s no commitment necessary. With our platform, we’re providing access to private investment opportunities in local geographic areas.

Fundology: What challenges have you faced building a two-sided marketplace?
Baker: The challenge is just being sure that the supply meets the demand and right now we’re curating the marketplace of very high quality businesses. We’ve received a lot of investor interest to be a part of this marketplace because these are really interesting businesses, such as the new craft distillery or the CrossFit gym. So we’re seeing a ton of investor interest to be a part of these opportunities.

We’re being highly selective on the business side right now. We’re looking at businesses that do have at least a year of historical revenue, they’re profitable or can expect to be in the next six months. They’re looking to invest in a revenue-driving opportunity. For us, it’s just a matter of making sure that we’re showing investors really cool, interesting opportunities to put capital to work into. I’m happy to say that we have a very solid pipeline of businesses that will be launching on the platform in the coming weeks and months.

Fundology: Can you tell us about some of the recent changes to general solicitation laws have affected Bolstr and how you are reacting to them?
Baker: Bolstr is a thriving marketplace where individuals were able to conduct private offerings amongst friends and family. What some of this new legislation does for us is allow us to open up the platform and allow businesses to solicit capital in new ways that weren’t possible before. Just yesterday, the SEC lifted the ban on general solicitation for verified accredited investors. So, we launched a more sophisticated marketplace in response that allows accredited investors to sign up and once they are pre-verified they’ll have access to opportunities that they never had access to before.

If you look at the statistics in the past, only 234,000 accredited investors or only three percent of total accredited investors in the country, had access to angel opportunities. And these were primarily the most well-networked individuals out there. So what this lifting of the ban on general solicitation does is it gives access to the other 97 percent of accredited investors out there, it democratizes the opportunity to invest in the private sector and be able to participate in what was previously a closed-door marketplace.

Fundology: Tell us what your future plans are for Bolstr.
Baker: Our future plans for Bolstr right now are to scale up and really help serve the Chicago area by providing access to funding for interesting businesses and really just providing access to individuals and professional services. Doctors, lawyers, anyone that does fit the definition of an accredited investor to be able to access this new marketplace place and give it a shot, invest in some interesting opportunities while also supporting their local economies and communities.

Fundology: What some of the ways you plan on scaling your business?
Baker: Right now we’re doing a lot of grassroots outreach and we’ll be throwing some events here in the coming months. We’re providing different educational information on the new capital marketplace that’s evolving online on our site. I definitely encourage investors to sign-up for our newsletter and read accounts on our platform and at least access this new class of investments that are opening up.

Andrew Parnell – CEO of Birdfeud

Andrew Parnell – CEO of Birdfeud

Birdfeud provides innovative digital solutions for early-stage and small businesses. They serve as a technical partner to businesses in need of expertise and offer product development, design and user experience and marketing services. Andrew Parnell is the CEO of Birdfeud.

Fundology: Please tell us about Birdfeud.
Parnell: We are a digital services company that helps startups and small businesses with all their technology needs, whether that’s developing a new website, design work, building a beta or an MVP product, as well as just being a technical partner for the companies. Some startups have one person trying to do it themselves and we provide our team as a technical partner to help grow their startup or their entrepreneurs getting started, or even help small businesses with their technology to take that next step.

Fundology: What size of companies do you typically focus on?
Parnell: We work with everything from the smallest one being a single entrepreneur to some of our clients who have 10-20 employees, pretty good revenue, upwards of a million dollars a year in revenue, so anywhere in that range we like to work with.

Fundology: What drove you to create this company?
Parnell: I have a consulting background. First few years of school, I was in IT consulting and project management. Prior to this, I joined another startup and I worked there for a couple of years and kind of got my feet wet, toes in the water if you will, just testing out another startup and learned a lot. I really enjoyed the startup environment. I really understood the challenges that startups go through and eventually got that itch to just start my own. I knew there were a lot of things I could do, so myself and a couple of my buddies at the other startups said, “we can do this and we have some really cool ideas.” We wanted to take the opportunity while it was there and while we were young and we didn’t have families yet to go out and take advantage of it and start our own company and see what we can do.

Fundology: Tell us about the specific services that Birdfeud provides.
Parnell: I’ll walk through each one. One of our most common services is what I talked about, the technical partnership. A lot of times, there’s an entrepreneur or even somebody running a small business that doesn’t have the time or the budget to hire some full-time developers or full-time technical staff or a CIO for their company. What they really need is somebody to help them, a team to help them do development, a team to help them fix up their website or take this around to the next level or sometimes even to show up to meetings as a technical partner.

That’s where, instead of hiring one full-time person who maybe has one skill set but not something else, we offer a broad range of skills as a team to act as your one technical partner. That includes things like custom development, design, helping fix your own website, strategies for moving your technology moving forward, as well as attending meetings or talking to investors as your technical partner to help answer some of those tough technical questions that a lot of business-focused entrepreneurs or small business owners don’t really have time to or not the expertise to answer. We do that, so that’s kind of our technology partner angle.

One of our other popular services that we do is building MVPs and beta products. A lot of startups and entrepreneurs have a great idea but they don’t really know how to get started and they don’t have a huge budget. What they want to do is hire somebody overseas or hire a freelancer to build their product or MVP, which is fine and that’s affordable, but a lot of times, they don’t get the quality they’re looking for. When they try to pitch to investors, the technology doesn’t work the way they want to and it’s not really a great product.

Since we have such expertise and such talent in building products, we can really focus on understanding the requirements and the whole idea of what their business is trying to be and help them build their MVP or beta product so that it looks beautiful, everyone understands it, and users can sign on and use it, functionality works, and it’s that first push to get you to be a reliable business and somebody that people trust.

Fundology: Tell us about your biggest failure in business and what you learned from it.
Parnell: One of the biggest failures, and I’ve talked to a lot of people that I meet at 1871 and other places to help other startups learn from their lessons, even though I’ve only been here for a year, I’ve already learned a lot of lessons and I think the first one was trying to build the products and trying to build the businesses and sell the business before I add any customers or any clients. What we realized is that we built this awesome piece of software originally when we first started the company and it worked great. Everything worked perfectly the way we wanted it to, but we never really thought about what someone was willing to pay for this or how we were going to sell this. We knew kind of the business model and I think that’s where a lot of entrepreneurs struggle.

On paper, they write down what the business model is and they feel like that’s enough. What I learned is that we should have been going to clients and customers first, before we even had this awesome product and say, “What are you willing to pay for this? What do you need? How can we build this for you?” and then build the product after we’ve already had customers who say what they’ll pay and how much they’ll pay for it, as opposed to building an awesome piece of software, then trying to figure out how to get clients and how they’re going to pay for it.

We’ve kind of shifted the business model and we’ve taken this to heart with these services. It’s let’s go find clients that need our help, that need our expertise and then figure out after we’ve talked to clients about what their needs are, how can we address these needs. If we need to bring on more talent or more specialized talents to be able to answer those needs, we could do that after we’ve found the client that we know how to work with.

Fundology: What are your plans for Birdfeud going forward?
Parnell: We have a lot of plans going forward. I mentioned the previous product that we launched. One of the things that we want to do after we continually work with startups and provide other services is to start building some new products after seeing what the common problems are. What are the common things that a lot of startup and small business owners have? Can we build a tool or build something that will address these problems that most people have? Say each startup is facing the same issue, how can we build something that isn’t just for one person but can solve this problem for many companies?
Same with small businesses. I’m sure there’s a lot of problems that all small businesses have that they need one person to address. Maybe instead of building it for 10 different clients, we can build something that will fix it for all startups that we can leverage as a single product that our business can offer.

Carl Hirschman – CEO of CareTree.me

Carl Hirshman

Learn more about Carl Hirschman and CareTree.

CareTree is a collaboration platform designed to replace the paper records in the home health and senior care industries with an online platform that centralizes information and automates communication with care stakeholders.

Fundology: Please tell us about CareTree.
Hirschman: CareTree is [like] a HIPAA-compliant Facebook, where you can create a patient profile for yourself or a loved one, and then invite family, doctors, and caregivers to access that profile with role-based security, so you can decide what is shared with who.

Fundology: How are you creating value for families?
Hirschman: Healthcare is really complicated, especially when you’re dealing with the elderly. 80% of people that are receiving home care services have two or more chronic conditions, and will see an average of six doctors per year. For a family member who’s trying to coordinate that care for Mom or Dad as they’re traveling between all six doctors, as well as receiving home care and everything else, that’s really complicated. Then trying to inform their brother and sister who live across the country about the care that Mom is receiving. It’s not an easy task and it takes away from their work, it causes them stress.

It’s the 21st century, so instead of having to play phone tag and shuffle all this paper, why not have this information at your fingertips?

Fundology: Tell us how value is created for caregivers.
Hirschman: Caregiver efficiency is the number one factor for health home franchise profitability. Right now, these caregivers are documenting everything on paper. They’re playing phone tag between the doctors and the family members as they call and ask questions and coordinate care.

They’re scanning this paper into, let’s say Dropbox; doing emails, and then putting everything into accounting. They’re using all these different systems, whereas CareTree takes care of it all for them and centralizes it into one system without disrupting their work flow, which allows them more time to provide better care, which makes the families happier, differentiates themselves, and makes hospitals happier if they can provide the better care.

Fundology: What are some of the challenges that you’ve faced starting and growing this business?
Hirschman: We really face challenges on two fronts. One, again, healthcare is really complicated. Even the people within healthcare, they sometimes don’t understand all of the challenges that lie within the industry. We found that the people that have dealt with this situation, which is one third of American households and only continuing to grow, they get it immediately, they understand the challenge. Just finding those people who get it immediately, opposed to the people that haven’t experienced it.

Then the other challenge is finding talent. It’s a chicken and an egg, where you have to need to have funding to get talent or you need a product built by talent to get the funding. That was a fun process to get through.

Fundology: How were you able to get through that process?
Hirschman: Fortunately, I can’t say enough about the people that support and believe in me. It helps that this is my third company, so that I have a track record of executing. There’s a lot of people that have really believed in what we’re doing, believe in me personally to support us, introduce us to people that can continue to help us and invest personally, so that we can make this happen.

Fundology: Can you also tell us how you came about finding those key potential customers that really know your industry?
Hirschman: It really started with one key customer. To take a step back, this all started about a year and a half ago, when my mom had approached me because she had been watching over some family friends receiving care, and was telling me about the challenges she had communicating with caregivers.

I operate and own another company that is in the senior housing industry, and had been volunteering at a senior housing community, teaching an iPad class to seniors, and asked one of the caregivers there, “Hey, this must be an isolated problem in small-town Iowa. How are you solving this problem?” Immediately, their feedback was, “This is a major problem for us.” They became our first advocate, and actually our first user, our first investor. It all stems from me donating some time to teach an iPad class to senior citizens in a community.

Fundology: Tell us what your future plans are for CareTree.
Hirschman: Our goal is to revolutionize the healthcare industry. Right now, we’re working to close another round of funding. We have a $30 million sales pipeline built up in the past three months. We are working to execute and close on that.

We have some really big partnerships that are in the works that will allow us to gain some very exciting national distribution. Then, we can really make that impact into every person’s life as they’re managing the healthcare record for themselves, and more importantly for loved ones with really, really complex healthcare needs.