The Toolkit

Tools for building the future

The Toolkit with Dave Schnadig: Delivering Value to Companies

Top Takeaways

  • The people you work with can determine your company’s success.
  • Never forget to value the critical workflows of your company.
  • Always be ready for changes.
  • Know what values you are looking for and nurture that across all your business decisions.
  • Invest wisely in business and consider how changeable or predictable an industry may be.
  • Standard processes to make it easy in the long run.

Guest Profile

Dave Schnadig, co-president of Cortec Group, a New-York based private equity firm, joined the company in 1995 as a managing director and was promoted to partner in 2000 and managing partner in 2010. At Cortec Group, he has served as the board chair of many of the firm’s portfolio companies, including YETI Holdings, and leads all investor relations activities.

Prior to Cortec, he was assistant to the chairman of SunAmerica, where he co-led merger and acquisition activities and managed a $350 million alternative asset investment portfolio.

Prior to SunAmerica, Schnadig was an investment banker at Lehman Brothers and a management consultant at Cresap, McCormick & Paget.

Schnadig graduated Phi Beta Kappa from Trinity, earning a B.A. with honors in economics. He earned an M.B.A. from the Kellogg School of Management at Northwestern University. Schnadig previously served Trinity as a member of its Board of Fellows. He also serves on the Board of Trustees of East Harlem Tutorial Program, which includes its charter school network.

Schnadig lives in New York City with his wife, Lori. They have two children: Jennifer, 23, and Matthew, 21.

Episode Highlights

  • Delivering value to companies: Business has always fascinated Dave, so his grandfather took him on trips to Taiwan and China. He saw that any business or company needs to see the global nature to understand different functional areas like sales, marketing, product development, operations, and inventory.
  • Choosing the right deal and investment for companies: Dave loves a business that looks a lot like a family entrepreneur-led business. This kind of business has important values added during the ownership. It is important to ensure that you identify the characteristics you want to have for your business. Invest in assets that can speed up the work processes, like a warehouse management system (WMS).
  • The path to be a leader: Poor performers drag the business down just as much great performers pick it up. Learn all functions in your business from HR to marketing. If you start a business at a young age, by definition, you learn how all the functions [of business] work. But in a trial by fire kind of way.
  • New perspectives: COVID-19 not only did performance wane for most businesses and then recover. It was a wake up call, that [entrepreneurs] were too concentrated in an asset. Try to avoid investing in business industries that are changeable and unpredictable, even with all resources available.

About the Host:

Justin Fortier lives in Brooklyn, NY, and works for a consulting company serving industrial companies.

How to Connect with Justin Fortier

Share The Show

Did you enjoy the show? I’d love it if you subscribed today and left us a 5-star review!

  • Click this link
  • Click on the ‘Subscribe’ button below the artwork
  • Go to the ‘Ratings and Reviews’ section
  • Click on ‘Write a Review’

Transcript

Justin Fortier: So we were actually just talking people and hiring specific experts. And listening to one of the podcasts you had done before, I noticed the cortex started as a group of operators, but then it transitioned to, they really did need some of the financial skill set that you brought from investment banking. And now, the firm is mostly run by people with a financial background, but you’re still doing the similar, or the original intended approach where you’re really helping with the operations of all your portfolio companies. How did you get to that, that point where you’re acquiring those different strategic skill sets? Is that more of a investing decision? Or how’d you get that the talent selection and get up to date on all these variety of industries you’re actually in?

Dave Schnadig: That’s a great and multifaceted question. No, it’s great. And I’ll take you back. Because this has actually been highly strategic. From a, from answering the question, how do we actually deliver value to our companies. And when I first met the original core tech folks who are not here anymore, some of them literally not here anymore, they were much older, they were clearly business people, but they were extremely limited. They were virtually all engineers. And they focused on highly engineered components, rather than on an end product. So something that might go into a nuclear submarine or a piece of aircraft or even a complex piece of machinery that was non governmental. Those folks were very narrow, very deep. And as a result, their limitations showed themselves a number of ways. In fact, they’ve never even been on the United States, or business. So they’ve never gone to China. They’ve been to Europe, the world was shifting. I grew up in a family furniture manufacturing business, Chicago, that was global that was the largest family owned furniture manufacturer in the world at the time. My grandfather started it My dad was a lawyer wasn’t involved at all. And but I was the eldest grandkid. And I was fascinated by business. So my grandfather took me on trips to Taiwan first and then Mainland China, as China became more of a manufacturing powerhouse. And I really got to witness firsthand the growing quality capability set as well as incredibly low cost that the Chinese manufacturing world brought to bear. And furniture was one of the first industries actually that got meaningfully disintermediated by China, was incredibly instructive. I got to see as part of the family business, a number of things. Beyond the global nature of business, which my or tech folks didn’t understand, I also got to see how businesses evolve and become by cost quality combinations. And I also really got to learn firsthand about different functional areas of business as even as a kid when it was sales, but marketing or product development or operations, inventory and things like that, but I didn’t really understand p&l balance sheet, etc. And I went to a management consulting firm out of college also, as a general strategy, sharp based IBO and global, at the time, had a really good couple year experience, went to business school, at Kellogg, at Northwestern, I really became painfully aware through a number of my peers who were in either accounting or banking a little I knew about financial statements. And I felt like having the knowledge base business and finance was critical. So I worked in banking for four years, but but I was never a bat. And I will tell you just, it was agony out I think that we used to do timesheets, physical timesheets, every week, when I left, I look back. And I had three or four days before my official end date. And I quit be clear to go to a completely different job, which was fascinating. And I told him about my hours, and I averaged 92 hours a week over almost four years. That is no way to live. But I got two years of learning in four years. And so I was went. And when I eventually came to Cortec, they were a bunch of business guys in a very narrow vertical. And I didn’t think that model was scalable. And it turned out that I was right. And it’s a very long answer.

Dave Schnadig: The baseline here is important for you understand, and so what wasn’t going to work was a bunch of older guys who will pretty set in their ways. Were knowledgeable based on history of things to do in businesses, but were lacking a lot of other contextual and analytical capabilities because they were so narrow. What my partner Jeff, when we hired him a couple years later, I decided in 99 as we put really a framework in place to grow the business and to evolve it was we want to keep operating capability. Jeff came from operations, he led to divisions of a billion dollar public company. So he was a businessman and he and I lead the firm. So our leadership team is really almost 5050 across those who come out of industry and those who come out of transaction lamp as we call it, it just set the record straight. But in terms of our vision for where we wanted to go, we wanted to hire younger folks who run businesses similar similar size, those we’d be buying. So 100 to 500. And we wanted to have knowledge sets that were in areas where we were going to be investing. So we hired one of those people out of consumer products, another person out of e commerce, which covers both B2C, but also B2B in terms of distribution and other businesses. And then another one in healthcare to supplement Jeff. And so we hired our main areas, and have hired continue to hire. And those folks were typically 36 to 45. So that they’re not fully set in their ways, they still want to learn, they didn’t want to be CEO of a Fortune 500 company, they wanted to mentor assist, build lower middle market companies into something meaningful and sustainable. And then there’s actually a slide I should have set you explaining all of this, but we try to explain to our investors, how are our models different, we take the folks that come out of business, and have been doing that for 25 years, right? So they’re fully formed CEOs or general managers and presidents, we take those folks, we expose them meaningfully to the transaction side, they’re not doing the modeling. But they see the outputs. And they have to figure out, you know, is $12 million of annual revenue growth, it’s a smart thing to model or EP model unless for and why and what kind of capital structure we should be considering 15,000 other things that go in to a model. And they’re part of that process. And they also learn the process of buying and selling companies growing up, and so we build this blend basically, where the business person is learning transaction stuff as they go up the ladder, the transaction folks who come in as 25 year olds with two, three years of investment banking experience and nothing else. As part of our interviewing process, we spend a lot of time trying to understand if they’re really interested in business, or if they’re just number crunchers. And some people you know, really love being number crunchers. There’s nothing wrong with that. Or they’re analytical without having an EQ when we try to find those folks who are relatively well balanced, hardworking, but want to learn always the business context. Sure the analytical exercise, and then have this goal of becoming a blend of business and transaction knowledge over time. If they really don’t want that. And we’re not going to hire out when we show them this pyramid, that this is how you evolve. And to be a managing partner at our firm, you really have to be a business thinker first and a numbers thinker second. And that’s what we’ve tried to build. So that is the model that we have. We continue to evolve it back to the black belt piece. So we hired a guy last year, who ran global supply chain for the largest division of Danaher corporation is literally and you may have heard of it in your consulting business.

Dave Schnadig: They are widely regarded as the number one place to learn global best practices across almost all functional areas in manufacturing and supply chain. They were originally founded as basically a public company that was doing private equity like deals, they build themselves up by acquisition. But what they got really good at was actually driving organic growth in the core of what they owned. So we hired a guy from Danaher ran global supply chain for three and a half billion dollar division. He actually was head of all operations, not just global supply chain. And he’s he was 45. And we hired literally, a total rock star. On the manufacturing side, he was a lean black belt. On the supply chain side, he had one purchasing through a variety of different organizations, buying other people’s stuff. He had spent years and years traveling the globe and going to factories that were third parties to that Institute and bad qualities. He knows every aspect of operation, so why, but I don’t do it for a living I never did for a living and I never got paid to do it. I’ve learned it from the outside in. He knows it from the inside out. He also happens to have a ridiculously great personality. And so he can ingratiate himself to our management team, and have them view him as a tool to add value to their businesses, which is exactly what he does. So that was a huge hire, and what you’ve continued to do, and hopefully you’re you’re hearing this is that running Cortec and running a business. It’s a continuum of looking forward all the time, and trying to implement those things make sense in your business as quickly as you can. So you can capitalize on these trends as they continue to occur is like a decade ago when I put ecommerce investing, which wasn’t even called e commerce back in front of our team here and we talked about some of the mega trends around first distribution actually And it wasn’t DTC was all b2b about creating systems whereby customers could order via a portal, and how that portal would operate. And it was all off the internet, the day of communications by email. And it all seems like this was 100 years ago. But what’s shocking? It’s Ted. And so we started investing in e commerce businesses on the b2b side. And then we took some of that knowledge and capability. And actually, it was a cornerstone of my strategy for Yeti, which was to build a DTC business because they didn’t have any. We had a branded product that we thought if we talk directly to our consumers, we could actually build a relationship that didn’t have that intermediary between us, which is the retailer. And so now Yeti does more of its revenue on its own website through Amazon than it does some third party retailers that were growing third party retail at 30% a year. So it just tells you how fast eCommerce has grown in any way. My point is, we’ll continually looking, we want to continually supplement this firm, with folks from real world business experience, train them up on the deal, slide, add value as a team of people who came up from transaction land and business. And that’s how we started on every business that we invest in actually has five or tech professionals. And it’s always run by a managing partner. And while I’m the CO president, I’m also a managing partner and me lead the deals that we do, we don’t go play golf. I try to play golf, but I actually work. And so that’s the model.

Justin Fortier: Yeah. And that makes a lot of sense how you’re adding people. And I heard on a previous interview, that you guys look at a lot of deals, but actually can rule out quite a bit. When you’re talking about training people up on the transaction experience, I think you’ve said that it’s dangerous to just go where you think you’re already competent, as opposed to looking to buy a really great business. And when I look at some of the businesses that are on your website, like Chauvet and Yeti and groundworks, these are all totally like, right? Yeah, all totally different, but do seem to have a very strong premium, I wasn’t able to tell just by my brief looking that you’re going for, like many businesses that are like we’re a commodity where we’re trying to just have the best operate like best manufacturing people in there who are going to turn it out quickly. Am I perceiving that strategy and tell me a little bit about what what boxes have to check when you are looking at a deal for it to be right for you guys.

Dave Schnadig: First and foremost, our overarching strategy is to partner with entrepreneurs and family to be the first control institutional capital in and that’s where our platform investments, the vast majority of add ons, we acquire for those platforms, we are the first. That’s true. So if you step down from that overarching strategy, and everyone’s while we buy from private equity, too, I will tell you, and sometimes investors crack up at this, but it’s actually the truth, there are some private equity firms that actually do add value to the business by some I would say it’s the reverse Pareto role. So 20%, out of the 80. That leaves 80% of private equity, who really just spends assets don’t know what they’re doing. They just look at numbers on paper, because that’s how they’ve been trained. They’re just deal guys. And guys and gals, by the way, many women we love those kinds of opportunities, because we can see a business that looks a lot like what was a family entrepreneur led business, and no value was added during the ownership. Shocking. But that’s the preponderance of private equity. So we look for those as well. But what about On the flip side, about 80% of what we buy tastytrade screen with a versus on it? So we start with that as our overarching, we’re then looking for a lot of what you were just getting to, which is these are products or services that are differentiated and sustainably. So take that as some next level down. And then you look at why and how are these products or services differentiated sometimes it can be patent protection, sometimes it can be geographic strength, or dominance tends to be the case services more than products, and many other reasons. We have a three and a half page checklist, what makes it great investment zero of the investments that we’ve made in my 26 years here, I’ve checked all the boxes, but the key is twofold. One checking as many of the good stuff boxes as you can and not checking the bad stuff boxes. So we’re really careful about things like customer concentration where you know, a change in relationship offering 10 15% lower prices, something unexpected that you don’t even know can fundamentally change your revenue structure. If you got 25 30% of your revenue with one customer that’s a big issue for us product concentration the same Do you sell an awful lot of one skew that could either be made better by somebody else or just rust in because the reaches the end of its lifecycle. So there are a bunch of things we just don’t do and commodity products is one of them. Actually retail Forever was on our list, we never felt the ROI of owning retail other than part of an omni channel strategy over the last couple of years, retail, it’s never been a good place to invest. From our perspective, we turned out to be right there. Technology, we do not do software. And we understand software quite a bit because we, I think I’m on my 11th ERP implementation right now, we understand software, we use all sorts of engineers and coders in a number of our different businesses. But that’s as part of the business data science. It’s becoming a huge deal and e commerce right now. And we’re building data science teams that are often made it made up of folks to either have very extensive mathematical training, or training as software engineers, because it’s high IQ, and very comfortable in mathematics, which matters an awful lot when we do coding data science work. So we’re comfortable with but we don’t buy companies that do that for a living, there are other private equity focused on it. So we ended up becoming was a highly focused generalist with our strategy at the highest couple levels being exactly as I laid out for you, with our businesses having a number of common characteristics and avoiding a number of things.

Justin Fortier: Interesting, and for the I’m thinking about if somebody is starting a business in venture capital, which I get a lot of exposure to in my day job. Now, the venture capitalists are always looking for people who are just like looking for a world changing vision. But I know a lot of people are my peers that are might be interested in starting a company that eventually will probably be sold, if they don’t have any family to take that over. You mentioned that product concentration was one area that could significantly hurt the value of your business, if you’re trying to sell it. Are there some areas that you feel like are, I want to say low hanging fruit, but I’m not sure if that’s the right word that a lot of these founder led businesses typically don’t have, by the time you get there be if somebody is out starting a business, they should really think about, get this right early, because it could really significantly impact the trajectory of what you’re building.

Dave Schnadig: Yes, and they’re the two hardest things to get right early, because they’re really expensive. And VC actually does reward this. And then we look at businesses that have been owned by BCI, a bunch of VC stuff on the side, because of the Yeti investment. It’s a longer story, two things that people don’t get right enough trying to build companies. But that are really hard to as I started to say, our team, and IT infrastructure. And it’s for the reasons I said, when you’re, you know, 25 years old, or 22 years old, but you’re primarily an idea, trying to find a home, you don’t have a lot of excess capital to build property, you actually don’t even know how to evaluate talent with time and experience a lot of interviewing we, we basically build teams from the director level, or VP level on up, and I’ll find out I’ll interview 100 people a year, and so will my partner’s a year, I’ve been doing this for 20 something years, you meet lots and lots of people, we’ve honed interview guides, we have personnel and third party personality tests used to supplement our isn’t a bunch of other stuff that we’ve implemented as we’ve gotten smarter and better and more experienced. To build that team properly is costly. And when you’re the entrepreneur, and maybe you’re bootstrapping, without any VC, you’re actually focused on cash flow, because you got a business going, it will be very hard, same things true. And it any business that ships directly to consumer needs to work with Shopify, Shopify is the best sort of low end small company software to implement to manage your warehouse through to the shipment. And lots of people still don’t do that they sort of try to muscle through most people end up working on QuickBooks, because that’s what you start managing a business because it’s less expensive. But that’s not a leverageable package. So you have to get off of that as fast as possible. And with with those with without a Shopify without, with without a real ERP, you lose business information. So you end up managing business information with Excel, as opposed to business information tools. And as a result, when you are the CEO of a six person business that’s growing reasonably well, what you can’t do is extract the data that you need to make smarter decisions. And the problem is that when you’re that CEO, you’re literally a fireman, or fire woman, you’re walking around with a fire extinguisher and you’re just fighting those fires and how can you think for a moment from a business analytical perspective and you don’t have the data and you don’t have the data. You don’t have the time to tear through Excel. By the time you get some of that stuff. It’s all way outdated anyway because you don’t have business relation systems, being able to manage bigger business becomes something that you can only aspire to. But you didn’t put the building blocks in place to get there. It’s the two most common issues that we see. And they’re the two toughest fix. For the reasons I mentioned.

Justin Fortier: As a young person, especially in the management consulting business I was in the, that was evidently apparent to me as the young person because I’m usually the person trying to wrangle data. And I was like, how are these, in this case, either running or running the business got a 400 million revenue operation that seemingly has no insight into like 50% of their process. And that was mind blowing to me. And I was like, this seems like something they should fix. But there were always other fires. And we were usually coming in when the situation was bad. So there’s even bigger problems to deal with. So we never got there. But my thought was always like what could happen if you actually were able to organize business information in a way that like people could collaborate and speak from the same set of facts that seemed really exciting to me, but I, I honestly wasn’t sure if that was just a luxury. And I didn’t have the context. But that was something that I thought was like, I tried to get recording, even in something basic and be willing to make that investment early on. Because one of my goals with this podcast is I plan on starting my own business in the next year or so. And that was something that seems like a good use of time for me as long as I’m patient and and willing to work around that.

Dave Schnadig: Good partners who will feed that vision, as opposed to starve it. Because you are right, look, I’ll tell you one of our companies right now, which is growing very rapidly, it’s very complex, it’s five divisions that were acquired over time. And the base business, we bought this business from another private equity firm that was in the 80% category of zero value at but we knew the core 100% DTC in specialty automotive parts enthusiasts who liked to fix their cars. And it could be just oil changes, but it tends to be more sophisticated than that. And we only make as well as buy and resell a variety of very interesting stuff. So it makes good money. It doesn’t have the infrastructure to leverage the combined enterprises. And there really are some cons, there’s some commonality across all the different business units. And from a process and a customer experience perspective, it’s all the same. But they don’t have a fundamental ERP from which to operate. So we’re implementing that they don’t have a common warehouse distribution system to work from. So we’re implementing a WMS warehouse management software system. And then it doesn’t have the scene order to delivery logistics experience, which is the what’s called an order management system, different software than the WMS. And so we’re implementing that. And we’re applying this across these six visits five, out soon to be six businesses. It’s a massive undertaking to do that, when you’ve got a $250 million business in multiple locations. And had they just done it right from the beginning, just they could have actually managed that across the businesses as they bought the prior PE owner didn’t put a penny into systems just felt it. And we knew we’re going to have a major investment. And we’re not afraid of it. So the great news is we’ve been growing the business at 25% a year for the year and a half owned it, we’ve got great performance under our belt, we can now take on this massive project that’s going to you know, it’s going to be a diversion, it’s going to distract people from their day job, you can’t just do this, you know, and think as a hobby, it’s all going to get done. Cross functionally, you have to have buy in throughout the organization. Sure that ERP implementation is successful. It’s just not the IT department. And I’ve seen and been part of very unsuccessful ERP implementations early on. And we’ve improved steadily in how the checklist of what doesn’t doesn’t work gets implemented in each process. So this is going to be a bear, but it will be successful. And I’ve got a great team. First thing I did was hire a new CTO, who’s highly experienced at doing this or CIO chief information officer would call them. And he had experience working with this particular software that we’re implementing, which I’ve worked with three times before successfully in the shortcomings and suit of, of the software. So anyway, it’s agony. Ex Post Facto, if you’ve got it in early, and you’ve got that ability to grow with that software. You’ve just saving yourselves a whole bunch of trouble and getting all the data that you and I were talking about. That helps you make better business decisions real time.

Justin Fortier: Interesting, and do you work with third parties you mentioned hiring a CTO, I listened to this podcast called the private equity fund cast which is Parker gala, a small tech PE shop out of Chicago that’s put out 100 episodes or so and it’s interest Because sometimes they’ll bring on partners they use for everything from search to like code base migration to PRP implementation. Yeah, NetSuite implementation. Yeah, things like that suites. So is that something where you, you guys have a knowledge of what needs to get done, but you’ve built relationships with firms that specialize with that in order to get that help get that done?

Dave Schnadig: Well, first of all 100%, we have the knowledge generally 100%. Third parties always use that. So when NetSuite will have call me partner, far, a value added reseller, so that won’t be a poor tech relationship, NetSuite or any of the mid market packages, Microsoft Dynamics, they have designated bars that have done hundreds of implementations, and they’re geographically dispersed. So in Chicago, you’ll have a different bar for NetSuite implementation, then we’ll have in Cleveland, for our company, but yes, we will use those folks. On the flip side, we work with two different firms in almost every key, what I’ll call supplemental due diligence functions. So when we buy a company, we’ll work with third party marketing consultants to validate the competitive dynamics and market growth opportunities of the industry. And there are three or four folks we use there, we use two different accounting firms do quality of earnings work. So we validate the numbers we work with, actually a firm based in Chicago called Western routed to our it diligence, but we also use KPMG, because they’ve hired a whole bunch of folks. So they’ll go in and take us through what is typically termed the technology caused by either entrepreneur or PE funds for not having put appropriate dollars into software systems. So we’ll use those consultant type folks to help us out. But from an implementation perspective, Justin will use specific designated third parties from our software, for example, actually, for another business, we just bought a very large piece of machinery for the factory, that machine manufacturer works with a factory layout consultants to optimize efficiency and actually uses Lean principles to ensure that efficiency is optimized wastes limited. And so again, another expert who will be partner but implementation. So if you split the two apart, for diligence and assessment, we use groups that are direct relationships with Cortec. For project based implementation work, it’d be much more the vendor who will specify the partner, and then we’ll vet the partner by a reference checking through the portfolio company, not at the quartic level, but we’ll we’ll make sure they’re doing the right stuff that we would do it.

Justin Fortier: I’m gonna switch a little bit you talked about in the interview you did with Trinity, I forget his name.

Dave Schnadig: Paul Selma, New York Times writer.

Justin Fortier: Scaling companies, a lot of times the founders you by have hired lots of athletes, versus utility players who are really good at something, when I was listening to you describe the path of it sounds like the other partner, or the supply chain person you just hire, he had come up through purchasing, and sounded like a real utility player. But for somebody who’s aspiring to be at the level you’re at, which is PE firm, or like a business owner, slash president executive, which is it possible to come up through both routes? Because you’re definitely an athlete now? But it sounds like you have some utility players that are able to see at this level, too. And is that both paths? So if somebody says I want to run a business, by the time I’m 35, or 40, can you go either route or? Tell me about it.

Dave Schnadig: I think really good question. And here’s why I think I’m not sure I’m right about some things. But this I’m not sure. But I think I’m right. to your specific question about if you have the objective of running a business, I can tell you how you’ll be the most well trained leader. And it’s how large businesses used to cross train executives. So GE used to have a really interesting corporate training program that I thought was extremely valuable. If you spend one and a half to two years in every functional area of business. You want to be the most valuable leader and by the way, leaders also have to be able to lead, they have to have charisma. They have to be articulate. They have to be incredibly paid. There are a number of personal characteristics, you have to be incredibly driven. They have to act like an owner, when they aren’t always an owner. I mean, there’s tons of characteristics that must exist to make someone successful leader or should exist. There are some people who are remarkably unusual, like Elon Musk, who just rises based on pure intellect and art Work, a little bit of luck. never hurts anybody. But back to the question. I would say, work in sales, work in marketing work in the different aspects of operations, work in HR, understand the challenges of hiring and firing people the importance of calling poor performers, the bottom 10%, what was really important you have to remove people will not delivering, if to give them opportunities to improve, put them on performance plans, give them tools, but if they do not improve sufficiently, you have to move on from that because poor performers drag businesses down just as much as great performers pick it up. You need to spend time in it, you literally need to work at every function of finance, understand what’s done, understand how payables work and receivables and, and ask questions and go through data and learn these functions, such that by the time you’ve done all that it’s 10 years later, and an athlete who’s been trained in all the positions. So your utility player who’s good, because you understand every position, there are very few players baseball today who can actually play almost every position because Brian’s one of them, and Chris Brian’s value, and I’m a Cubs fan, now that he’s with the giants. It’s a bit of a tragedy to me. But Chris, Brian’s greatest value is not all the homeruns he hit. And the fact he hit for average for much of his career so far, because he’s still pretty young. It’s that you literally can put them anywhere in the field, that catcher not pitcher, but any other position, play and has played it probably everything. But shortstop, which is pretty unusual in this day and age when everybody’s a position player. And so when you look at an organization, a position players are strong, and what they do when you’re a little company, you don’t have that luxury. Maybe you can hire a head of marketing. If you’re a digital e commerce related business. Maybe you can hire out a marketing who’s got that deep skill set. Today, maybe you can hire a really good young controller, be your CFO, that’s great. Maybe you get a sales person, if you’ve got product that’s sold through the wholesale channel, tough. All the rest of it. No way. You guys are all just gonna be running around doing as much as you can at each functional area. I will tell you the wall so if you start a business at a young age, by definition, you learn how all the functions work. But you in a trial by fire kind of way.

Justin Fortier: Yeah, sounds exciting. That’s probably the path I’m gonna pick but for the pain, or, yeah, it’s exciting to be surprised by the pain.

Dave Schnadig: Yeah, painful. Oh, look, you’ll just be tired. You’re, it’s exhausting. Because you just don’t if you got a great idea. And it gets traction. By definition, you serve enough team to keep up.

Justin Fortier: On the deal sourcing side, for Cortec when I interned at a private equity firm, they were sent a lot of deal memos, but the the partner there are not deal memos. But it’s confidential and confidential information memorandum from investment banks, right. And when I was interned at an investment bank, I helped prep some of those. But the private equity firms said, yeah, we get a lot of these, we look at every one that comes through. But almost none of the deals we actually go through come from this route, but we might get some and it’s already prepared. And it helps us understand what businesses are out on the market. Is that a similar experience that you have? Or how do you find deals?

Dave Schnadig: In the average year, we look at about 550 platform opportunities. And we look at anywhere from 50 to 200. Add on opportunities. The platforms are businesses that average about 25 million and EBITDA. The add ons can be anywhere from one to 15. For the add ons, were a strategic buyer. So those very often will come through an investment bank may walk on from an outreach for us to act to the business. And because we can say we’re speaking on behalf of company x groundworks. For example, owners will take our call, because we are the dominant fastest growing player that basement waterproofing foundation or industry. When it’s Cortec, they get calls all the time for private equity. They don’t take those calls for a long time it’s an investment bankers represent 40 of companies that are for sale. And that might well have an owner entrepreneur who wants to reinvest because our model is not just to buy from the owner entrepreneur first is to have them reinvestment early alongside of us, they just want to sell, they’re gonna look for the highest price. If they want to sell and reinvest materially, they know that second bite of the apple is going to be very valuable particularly because of our track record, which I don’t mean to sound arrogant at all, but our track record is extremely good over 26 years. It’s very best private equity globally and If you reinvest, you should care who makes money, I have a big chunk of your money Mr. or Miss entrepreneur, you may as well make a bunch of it on the back end, secondary. From our perspective, we work almost exclusively, we still get deals in directly and over the transport almost exclusively with investment bankers. They account for 550 deals on average, at platform world. And this year, because of the emergence COVID, tax, likely tax law change, we’re looking at almost two acts on normal buying or it might even see a 1000. Opportunities this year. just crazy. We’re in total triage mode. But we do buy this sell by investment bankers and think about it. If you want a company that’s worth three 400 500 million bucks, are you going to just wait for a phone call and hope to sell the right guy? No, you should pay somebody to extract value from the market and help you interview in unlikely group of five to 10 buyers. And so we never worry about competing with other private equity firms. If they want to pay a stupid price, we won’t pay it. And if the management team owner doesn’t love our brand of private equity, deep partnership, every functional area, we’re meeting every month and personally taught anywhere from every data, once a week, depending on what’s going on. It’s them calling us. We don’t we don’t call them unless there’s a huge problem that we’re working on together. And I’ve always said that the value add of a relationship. Or the pendulum a word stands can always be measured by who calls. You call somebody if you need something. So if we’re calling them and we’re paying the asset, very helpful, if they’re calling us they perceive, hopefully, rightly, that we’re getting them value for that phone call. And so when we meet with these management teams who are considering selling, we go through our branded private equity. And if they love it, all they’re going to be concerned about as I get a fair value, they gave us last look, as it is known, meaning they may get offers for guys, and we’re one of them, and maybe the fourth guy see it when we were buying the business, we were the lowest offer out of nine that there’s under 10. They came back to us and asked if we could structure something on the back end based upon performance. And it took me five minutes to negotiate the deal with the two brothers because they wanted to work with Cortec, they knew they wouldn’t be investing 35% business, and they knew they needed our help to build it. And so we get those last calls, investment banker, direct sale doesn’t matter. We wanted to be sure the business is for sale. And then we can figure out the rest.

Justin Fortier: And when you’re increasing that evaluation from 550 to 900. How far do you read through each memorandum? No, I read every memorandum. There’s some things where you can just look at the numbers and say, “Okay, this won’t make sense for us.”

Dave Schnadig: No, if we did that. So there’s a calling process, I’ll tell you how it works. The vast majority of businesses that are sold to investment bankers, either they’ll send you a one page teaser, or you can have a phone call with that the company, there will be some they’re too big and some are too small, even though they generally fit our criteria that we’ll call out of that group that isn’t even in the 550 900. We don’t include those in the businesses that we assess. That’s how big the numbers really are, then the next layer is once we know what’s within our size range. And generally the bullet points over what they do. And you may find that margins are less than 30% of the gross line. gross margins of less than 30% typically dictate a business is more of a commodity seller back to your earlier question. It’s selling a commodity product or service 25. In the line, you just see that we will buy businesses with growth, gross margins are below 25%, because they’re not differentiated enough in the market has told them that by not paying them a premium for what they sell. So that’s a really quick cut that cuts out probably 25% of the companies that we look at others made inputs, commodity inputs. So we looked at a specialty food service ingredients company, two of them actually this week, and we killed them both based on what they do. Those conversations are a minute, and we review every deal. Every one of those that has the right size characteristics, every one of those every Monday. So we’ve been going through for the last month, believe it or not, so one month, 250 deals. That’s usually six months. Yeah, that’s the number 248 per size. And so we’re some of those are taking five, whatever 30 seconds. Some we go really deep and will basically at our firm, believe it or not. Our model is that when we we meaning a managing partner will read every book That makes it past the first cut. So we’re reading a stack of 10 books weekend, as are my partners. And so the most senior people do the initial work, not the junior people, we don’t ask them to do huge write ups, that it’s all just a big waste of time. You’ve got to have people who’ve got the experience, whether or not makes sense. And then when we see one that does, we share with all of them. And we say, guys, gals, read this over the weekend. And let’s be prepared to talk about that on Monday. If you do make a decision there. And then do we continue pursuing this and kill it? Because it’s more interesting, but it might not be interesting enough, or makes sense based on other attributes or three or four big questions come back, we’ll go back to the bank or asked questions and decide go no go at that point, such that we are we really only go hard after three or four businesses this year, it’s going to be more like probably 10.

Justin Fortier: And you mentioned that earlier, that’s because there’s a tax change. So a lot of these founder-led businesses are trying to potentially take some of or have some of their…

Dave Schnadig: Yeah, capital gains or 20%. If they go up to 30. And we don’t know where we’re at, and then the legislature up, but also true coming out of COVID. It’s interesting, just I don’t think you can, I don’t think you can bifurcate. The two we don’t know for sure, what causes people to sell. But COVID Not only did performance wane for most businesses and then recover. It was a wake up call, that they were too concentrated, particularly entrepreneurs to concentrated in an asset. They weren’t they had all their money tied up in this one asset. And they saw it crash and almost every business crash for three to six months. Because a lot more shut down. So that’s a terrifying wake up call. I’ve had some conversations, and I’ll ask these guys and women, or you bring the company to market, because the tax law change, like, oh COVID scared that blankety blank, blank automate. So it’s been interesting. So I think it’s a number of reasons. But it’s a big year, we somebody thing intentionally, I tried to get the COVID bump, as we call it, sometimes the COVID mountain out of the system. So you can look at real apples to apples performance and look, a lot of 2019 2018 growth rates tried to pull 2020 out of it.

Justin Fortier: And one, I think final question that’s a little more specific to one company, but the home services industry with groundworks Yep. Now that I’m actually living in an apartment and not quite a homeowner, but originally, I didn’t understand the level of service available that…

Dave Schnadig: Don’t buy a house until you have to.

Justin Fortier: Exactly. But I spent four hours yesterday bailing water out of our basement. So now I’m acutely aware of the problem. What have you learned about the home service industry? It seems like there’s a lot more opportunity for what you’re doing, not just in the basement waterproofing, but it seems like that whole category, what’s the biggest challenge? What’s the thing that you maybe weren’t expecting, that’s hurt the most about that. So be an area I’m quite drawn to. And one of my college classmates from Trinity, we talked a lot about going into that, that line of business. So what should be, we’d be looking out for?

Dave Schnadig: First of all, you got to be careful of event driven businesses versus call it daily issue fixing businesses, we had this weekend in the northeast was an event got a tropical storm, it was almost a hurricane. And it dropped a lot of rain, a lot of play, there are event driven companies that pump four feet of water out of a basement for you to do that. That’s not what groundworks is. So a business like Servpro or servicemaster. That’s what they do. And and I don’t personally believe as a private equity guy, that’s a very good business to invest in, because your business ebbs and flows based upon the weather typically. And I’ve never believed that investing in the weather is a good idea. Because the weather is changeable and it’s absolutely unpredictable, even with an almanac and so groundworks is different. groundworks is focused specifically on fixing the things that cause a sickness to leak. So it goes to the root cause which can be a number of different things because water travels and water always finds a way to enter places. If there’s a bunch of it outside. And I’ve had to deal with this with my house. It is very complex. The key though is to build drainage systems that pull water away that’s how you do it. So it doesn’t happen within the on what actually happens around oh no Number one, number two foundation repair is based on something related but different chest do with typically soil shifting chapters all the time, because it’s actually the main thing and the impact of those ships on your home, which can affect stairways, walkways, but it can also affect the balance of your home, and what happens underground, which can, again, also cause water damage to your home. So it’s really all related to water management. And that business has been a good business for a long time. But But what made groundworks interesting was that it was, except for one small part of the market, which is actually the Northeast was led by a company called Basement Systems. It was a local mom and pop business. And it was really, maybe there were a couple regional players, but it was really a fragmented industry that needed to be consolidated. And the founder of brow works CEO, who started with one branch in Virginia Beach, Virginia, and basically believed that if he brought excellence in, it’s actually a great lesson for you just listeners, which is if you bring excellence to a small business, you can extrapolate that across others. And he put money into a centralized Training Center, and a whole bunch of other things, thinking about where he was going to go with this. So he invested early, which is really hard to be talked about, into a head of training, so that he could institutionalize processes, which makes them much easier to roll out across large organizations. If you do things haphazardly, and you don’t have the ability to roll them out in a consistent fashion. You can’t do seven acquisitions a year, and streamline and normalize all those businesses to a common set of practice. He put that foundation of intended, and he made the core business leverageable. Now we’re almost at 600 million assets he started it was at 26, he invested we were a little over 100. And we invest with a year and a half ago. So we’ve grown almost 5050, organic and through acquisitions. And the one thing that didn’t count on that ended up being really nice one in our back was COVID. And the reason why is because people are working from home.

Dave Schnadig: And the little crack sidewalk, or the little leak in your basement that you saw on the weekends once a while and shook your head and said that you didn’t because it was a panda, but at maybe someone wasn’t open our weekend. And when you’re there all the time, people said I’m not put up with this crap anymore, I’m going to fix my home the way I want it, because I’m in it. And it was a blessing. And we were growing it, I think almost 20% a year. Without that, and 50 plus percent last year organically. With that, we also got a bunch of acquisitions done too, because the ground we’re being probably groundworks family actually includes a very significant equity audit that we push all the way down to the branches. So that our CEO believed in that. When he interviewed us as a potential partner for him. He said what do you think about equity and how far would you push down and told what we thought which is that equity ownership support and to people who value it. And if your team values at the branch level, we should push it down to the leadership there and he got out of his chair came over ship last you guys are my guys just give me a fair value. And we actually broke out on value very, very easily, because we thought the business model was extremely unusual. And we’re the only player in the industry which is very rare when you’re working in a consolidation, investment strategy. Usually there are three other plants thought of it too. There’s nobody and the largest player now is probably 6 billion but died. XYZ market at 110 million. So you don’t want to mess with us. You want to be part of a Yeah, pick the best players in every geography good. Paying something fair and have them reinvest they own part of the bigger machine. And it’s it’s not, we’re coming into steamroll, yet, they’re paying a fair price up front, let you buy into the machine. And then we’re all gonna win in a couple of years together. That’s working. So long answer. I know you’re running out of time, and I’m sure any one of your listeners is probably sleepy by now.

Justin Fortier: I really appreciate this. This was awesome. For me personally, I hope it was great for the listeners, too. I thank you so much for spending time. I learned a lot.

Dave Schnadig: I’m glad look. I’m glad First of all, I appreciate it was very nice to reach out. And that Yeah, I hope a little bit of something to help somebody somewhere. And good luck, just what you’re doing and keep me posted. It’s nice to meet you.

Justin Fortier: Great to meet you. Thank you so much. Have a great day. Bye. Yep, thanks.

The Toolkit

Tools for building the future

Subscribe to actionable episode summaries