December 12, 2024 • 33 mins
In this episode of PEX, the hosts explore the private equity selling process, comparing it to a dating game to illustrate the stages from initial teasers to detailed due diligence. They cover critical concepts like Confidential Information Memorandums (CIMs), virtual data rooms, and essential legal mechanisms such as drag and tag rights. Additionally, the discussion highlights the challenges founders face when adapting to new roles post-sale and offers practical insights into managing these transitions. Overall, the episode provides valuable guidance for navigating the intersection of entrepreneurship and private equity.
00:34 Host Banter
01:17 Reasons Founders Consider Selling
05:23 Understanding Drag and Tag Rights
12:47 Evaluating Private Equity Partnerships
17:52 Understanding the SIM Process
19:12 The Role of the CEO in Initial Meetings
20:10 Virtual Data Room and CFO Involvement
23:02 Navigating Private Equity Relationships
26:24 Challenges for Founders Post-Sale
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Three insiders. One mic. All things private equity — explained. Hi 👋 We’re Ed, Rory, and Emily — a CEO, a CFO, and a Chief of Staff — here to demystify the world of private equity. Between us, we’ve sat in the founder’s chair, run PE‑backed companies, and worked on the deal side, so we know the wins, the pitfalls, and the jargon (and we’ll explain it).
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:07):
Welcome to the Private EquityExperience Podcast.
Your backstage pass to thestrategies, stories, and secrets
that drive value in the PEuniverse.
No filters, no fluff, juststraight talk and expert
insights to help you navigatethe private equity world with
confidence.
And now your hosts, Ed Barton,Rory Liebhardt, and Emily
(00:29):
Sander.
emily-sander_1_11-05-20 (00:34):
Welcome back to the private equity
experience podcast.
How's it going, Rory?
How's it going, Ed?
rory-magnolialanepartners- (00:40):
good to be back.
Good to be back.
Yeah.
emily-sander_1_11-05-2024_1 (00:42):
You got some,
ed-barton--lawyer-_1_11-05-2 (00:43):
in the neighborhood.
emily-sander_1_11-05-2024_1 (00:44):
you got some nifty headphones there,
Rory.
rory-magnolialanepartners- (00:47):
well we finally figured out my
technical difficulties it seems.
After
emily-sander_1_11-05-2024_1 (00:52):
But you've gone full circle.
Now you're like,
rory-magnolialanepartners-co (00:54):
Ha
emily-sander_1_11-05-2024 (00:54):
sound like you look like one of those
NFL announcers who's like readyto go.
Yeah,
rory-magnolialanepartners-c (00:59):
put me up there with uh, Chris
Collinsworth and you know,
emily-sander_1_11-05-2024_160 (01:03):
I love him.
He's one of my favorite.
I cannot stand fricking.
Greg Olsen and um, someone, TroyAikman, Yeah, I don't know.
But Chris, yeah, I love him.
we're here to talk about,
rory-magnolialanepartners (01:16):
Yeah.
emily-sander_1_11-05-2024_1 (01:17):
um, selling.
So why, why would a founder,want to sell?
rory-magnolialanepartners (01:22):
Yeah.
Yeah, absolutely.
So ultimately, you know, ifyou're building a business and
you know, you've bootstrapped itor maybe even taken on some, uh,
seed investment or angelinvestment at certain point in
time, You know, you've takenyour business perhaps as far as
you can take it organically.
maybe there's some mitigatingfactors if you were a founder
(01:44):
without any successors in yourfamily or something like that.
You make the decision of whetherit's time to sell and who to
sell to.
emily-sander_1_11-05-2024 (01:52):
Cool.
So.
What are some of the reasonspeople could be considering this
if you mentioned some of them,but if they're just like
retiring, they're just like,I'm, I've done what I need to do
here.
And now it's time for somethingelse to happen or
ed-barton--lawyer-_1_11-05-20 (02:04):
a lot of times, you know, what,
where, what I've seen is really,there's, there's a couple key
drivers.
The biggest key driver is a needto diversify.
The most successfulentrepreneurs pour their heart,
soul, and entire balance sheetinto their business.
And once that business hasgotten stable, and they're doing
(02:24):
fairly well, and this is wherethat, that lifestyle business to
private equity, tension comesin, they've done really well,
but they've tied up their entirelife into their business
financially, emotionally,physically.
And so they're like, look, Iwant to take some chips off the
table.
That's, that's the number
rory-magnolialanepartners (02:41):
Yeah.
ed-barton--lawyer-_1_11-05-20 (02:41):
I see that the number two reason
that I see is related to that,which is they and their partners
have tied up all their lives andit's almost like a marriage.
And every one of those, I'venever seen a partnership go for,
you know, decades and decadesand decades without tension,
just like I've never seen amarriage go decades and decades
and decades without tension.
(03:02):
And when that tension hits,depending on how they work
through it, sometimes a need tobring in a third party or fourth
party or fifth party to kind of.
Settle down the ownership groupor to take out the partner.
That's like, look, I'm, I'm, I'mdone.
And it's then they want to rideoff into the sunset and you've
(03:24):
got another partner who wants tostay and build the business.
Those
rory-magnolialanepartners (03:26):
Yeah.
ed-barton--lawyer-_1_11- (03:27):
tended to be the two drivers outside of
I need growth equity capital.
rory-magnolialanepartner (03:31):
speak.
I mean, nothing is permanent,right?
So.
You're talking about many yearsof building, building.
There's another stage to anybusiness typically.
And that's, know, um, selling orliquidating or really taking, as
Ed said, some chips off thetable.
emily-sander_1_11-05-2024 (03:51):
Yeah.
So like we've worked withseveral founders and we were,
let's talk about the ones wework with together.
Like what were the reasons theywere initially entertaining
private equity?
ed-barton--lawyer-_1_11-0 (04:03):
Well, if I go back to my first, so not
ones where Rory and I firstworked together, we had
basically angel investors builtthat business, um, that ranged
from former, former, FederalReserve Board chairman to, uh,
you know, kind of local realestate developers.
And they wanted, theyessentially were like, look,
(04:23):
we've been in for 10
rory-magnolialanepartner (04:24):
Right.
ed-barton--lawyer-_1_11-05- (04:24):
has gone
rory-magnolialanepartners- (04:25):
Yep.
ed-barton--lawyer-_1_11-0 (04:26):
We're going to take our money off the
table and you need institutionalmoney.
So that's was why our firstprivate equity deal got got done
was a business had grown to thepoint where the angels wanted
out or the seed investors wantedout and they wanted to be
replaced.
They wanted to monetize and thefounder did not want to exit at
that point.
So a majority of the businesswas sold to private equity.
(04:49):
Um, and then the subsequent salethere was the founders and the
private equity.
team weren't getting along.
rory-magnolialanepartner (04:57):
Right.
Yep.
Yep.
Yeah.
ed-barton--lawyer-_1_11-0 (05:04):
their value was to sell the entire
business.
And when I think, you know, theyhad drag rights, so they
basically could force the othershareholders to sell, including
the founder that they were like,we want to get out we'll sell
our portion, but we actually canmake more if we sell the whole
business.
So they sold the whole business.
emily-sander_1_11-05-2024 (05:23):
okay.
So let's get into drag rightsand tag rights.
what is that?
ed-barton--lawyer-_1_11-05-2 (05:28):
So drag rights are when, and
normally it's a private equityguys that put this in the, put
this in the, uh, in the deal.
it's essentially says, look, if,We go to sell our portion of the
business.
We can drag you along with us sowe can force you to sell at the
same terms as we're getting forour sales.
(05:48):
So normally it's the drag rightsinclude a, and it's at the same
terms or conditions.
Again, we've talked aboutwaterfalls.
And so, you know, they're,whatever is in that category of
the waterfall, they get treatedthe same, but they're forced to
sell.
They don't have a choice.
Tag rights are when the privateequity guys go, we're going to
sell our 40 percent or 50percent or 60 percent and the
(06:09):
founder or whoever the othershareholders go, going to sell
too.
And so we're going to tag ontothat sale.
And if you're going to sell 60%,you could only sell your
proportional interest becausewe're going to sell our
proportional interest as
emily-sander_1_11-05-2024_16 (06:21):
So why are drag rights beneficial
to the PE firm?
ed-barton--lawyer-_1_11 (06:26):
Because that way they can force a sale
of the entire business.
And so a buyer is notnecessarily stuck with minority
shareholders
rory-magnolialanepartners (06:36):
Yeah.
It's
emily-sander_1_11-05-2024_ (06:36):
It's cleaner.
rory-magnolialanepartners-c (06:37):
one of those things where, you know,
you, you negotiate a deal, uh,and it's.
ed-barton--lawyer-_1_11-05-2 (06:42):
ha
rory-magnolialanepar (06:46):
litigation not to say that Drag rights
aren't litigated.
They routinely are but if youhave an understanding at the
time You acquire a business withfrom whom you bought it from um
You you can avoid that down theroad.
That's just like any othercontractual term You try to get
things out on the table andagreed to stuff hits the fan.
(07:08):
Um
emily-sander_1_11-05-2024 (07:09):
Okay.
Okay.
So it's just cleaner.
Like when you're trying to dodeals, like it's the whole
company is being sold or goingwith, going with you.
Okay.
So what's the advantage of tagrights?
The opposite direction then.
rory-magnolialanepartners (07:22):
Well, just as if you're, if you're a,
another shareholder, minorityshareholder, then you have the
opportunity to get in on thesame deal that the PE group
who's selling perhaps themajority share of their interest
in the businesses.
And, you know, riding thecoattails one way to put it,
but, you know.
You're, you're, you're basicallytagging along to somebody that's
(07:45):
got a vested interest inmaximizing the value of their
deal.
emily-sander_1_11-05-2024_ (07:49):
When would a PE firm want to leave
someone behind where someone'slike, no tag, I'm tagging on
like that's, I want to come withyou.
rory-magnolialanepartners (07:55):
Well, there could be any number of
reasons that maybe, maybe it'sjust time to sell, um, their,
their fund, the private equityfund itself.
Is, you know, past its primetime to liquidate, um, time to
go raise another fund.
So, I mean, one of the things wetalked about in previous episode
and certainly speak a lot to inthe book is like the sequential
(08:15):
timing of funds.
And, you know, that could be onereason.
It's just like, Hey, it's timeto, it's time to time to
liquidate, you know?
So, and there's not, unless youhave that tag, right.
There's nothing that compels thePE group to.
the entire company as opposed totheir share in the company
emily-sander_1_11-05-2024 (08:36):
Okay.
So that's.
Scenario based, which makessense, but sometimes the P is
like, I would rather you juststay behind here and we exit.
rory-magnolialanepartners- (08:45):
I've seen drag rights You know
Enforced way more than tagrights I don't hear a lot about
tag rights being a thing becauseusually as you said Emily I
mean, there's usually alignmentbetween the selling parties and
you're on the same page, butrights is one where I have
personally experienced it wherethat happens
emily-sander_1_11-05-2024 (09:06):
Okay.
So drag and tag rights are termsand conditions that one would
include, or I was not trying tohave not included in the overall
agreement between founderscompanies and the PE firm.
So that's just, that's wherethat comes into play.
rory-magnolialanepartners (09:23):
Yeah,
emily-sander_1_11-05-2024_1 (09:23):
And then you mentioned the waterfall
and we have mentioned thatbefore, but that's super
important.
So I just wanted to.
Make that clear, like the, the,the waterfall is the, how would
you describe this?
Like the, the sequence or theorder at which people get paid
out.
ed-barton--lawyer-_1_11-05 (09:37):
Yep.
emily-sander_1_11-05-2024_ (09:38):
it's very important to know what the
waterfall
ed-barton--lawyer-_1_11-05-20 (09:40):
a
emily-sander_1_11-05-2024_1 (09:40):
is.
ed-barton--lawyer-_1_11- (09:41):
sells, um, or when there's a
distribution of cash out of thecompany, So it may not need to
sell, it just may be thatthere's excess cash to
distribute.
an order.
in which that's done.
And normally that starts withsenior debt, then mezzanine
debt, then preferred, uh,preferred dividends, then
(10:01):
preferred stock, then common andoption holders are at the
bottom.
So it essentially says untilthese folks are paid off and a
waterfall is, is all spelled outin the combination of the
operating agreement for the, forthe company and the deal terms.
when you enter into the deal.
So you're going to have kind ofa couple docs to look at, but it
(10:23):
essentially spells out the, foreach dollar who gets that
dollar.
And when they're paid off, thenit waterfalls cascades down to
the next layer and then they getpaid off.
Then it cascades down to thenext layer until at the very
bottom is normally your employeeoption holders and warrant
holders and kind of the.
(10:44):
The folks who actually generateda lot of that
emily-sander_1_11-05-2024_1 (10:46):
But depending on the source of the
waterfall, there could be nowater at the end or it could be
like a baby trickle.
ed-barton--lawyer-_1_11-05-2 (10:54):
Oh
rory-magnolialanepartners-c (10:54):
Oh, yeah, that's absolutely true
Yeah,
ed-barton--lawyer-_1_11-0 (11:02):
There was nothing, there wasn't even a
trickle, there was nothing.
emily-sander_1_11-05-2024 (11:06):
Well, and we've been in situations, we
won't name names necessarily,but some very savvy founders who
said, no, we want to be, uh,preferred, uh, at the preferred
level
ed-barton--lawyer-_1_11-05 (11:17):
Yep.
emily-sander_1_11-05-2024_ (11:18):
what they, what,
ed-barton--lawyer-_1_11-0 (11:19):
going to, we're going to, if you're
investing in our company, we'regoing to be pari passu.
We're going to be exactly thesame as you are.
So we're going to sit side byside with you on the waterfall.
And then at the bottom of thewaterfall is going to be the
employee options.
So
emily-sander_1_11-05-2024 (11:34):
yeah,
ed-barton--lawyer-_1_11-05- (11:35):
sat right next to the private equity
folks and that, you know,
emily-sander_1_11-05-2024_1 (11:38):
but that's not normal though.
ed-barton--lawyer-_1_11-05- (11:39):
No, that's not.
Um, but they
emily-sander_1_11-05-2024_ (11:41):
They knew, they knew about that.
ed-barton--lawyer-_1_11-05 (11:42):
knew about it and they negotiated
rory-magnolialanepartners-co (11:43):
So that kind of speaks back to the,
you know, one of the firstquestions is why, why, why do
you sell your business?
And I guess I would say one ofthe things we didn't talk about,
we should, is this the simplefact of sometimes a founder is
convinced it's time to sell abusiness.
That's what private equitygroups do is they go, um,
develop relationships.
They go, um, search forbusinesses that are at a certain
(12:04):
point in their life cycle.
And, you know, they, they, theyeffectively can tell a story to
the founder.
And a lot of times it's true,uh, and, and talk about the
potential for their business.
If they do certain things thatmay be outside of what the
founder, thinks about, you know,or even conceives because, know,
they're busy running thebusiness day to day.
(12:25):
Maybe, maybe they don't have thevision, um, of the market, maybe
that a private equity groupdoes.
So, I mean, that's, that's tosay that.
You know, some of these dealsare just like any other deals
where, you know, there's twoparties coming together having a
discussion and they think 1 plus1 can equal 3 and so they decide
to lock arms and do it, youknow?
Like, it's, that's
emily-sander_1_11-05-2024 (12:44):
Yeah.
Besides the waterfall structure,what should a founder be
thinking about when they'reevaluating private equity as an
option?
I mean, we talked about some ofthe most common reasons, but if
someone's, you know, listeningand saying, all right, I kind of
have a sense of what this thingis, there's a lot of different
PE firms out there.
I want to make sure it's a goodmatch.
(13:04):
Like, how do I, like, what do Ilook for?
ed-barton--lawyer-_1_11-05-2 (13:07):
a, that's like a six episode
series.
Um, but the, the one I, youknow, outside of the economics
and, and kind of the, the dealterms and conditions, which are
going to be things that you'regoing to want to negotiate out
with any, um, private equity,uh, partner, there's two
elements that I think areabsolutely critical when you're
getting, when you're gettinginto a deal with private equity
(13:29):
team.
The first one is, are you reallyaligned on what the strategy is?
not the BS, you know, Yeah, Iagree, but I'll just deal with
it later.
They're never going to kick meout.
They're got, you know, well, youreally aligned?
And then the second piece, andthis is, this is almost as
important, is think about yourhiring as a CEO, your hiring
(13:53):
board members.
And use some of the samecriteria that you would use when
you're hiring key
rory-magnolialanepartners- (14:00):
Hmm?
ed-barton--lawyer-_1_11- (14:01):
staff, when you're partnering with your
private equity firm.
So, are these folks, are theysmarter than me?
Are they going to add value?
Are they going to bringsomething unique?
Are they going to strengthen mymanagement team?
Are they folks that I could siton a plane with for 12 hours and
fly to Dubai and not want to,you throttle them the entire
way.
And if you can answer yes tothose things, so you go, look,
I'd hire these, these guys forthis executive team.
(14:24):
And we're aligned on thestrategy.
You're probably outside of thedeal terms.
You've probably got thosesubjective items fairly well
rory-magnolialanepartners (14:31):
Yeah.
I mean, not to be, you know, toosimplistic here, but do they
understand your business and,you know, talk about alignment
on strategy.
That's one thing, but really dothey understand, you know, the
nuts and bolts of the businessthe way that you do?
And maybe the answer is no, andit's still okay.
But if it's yes, and you reallyhave that mutual understanding,
(14:53):
it can be extremely fruitfulpartnership, you know?
Um, so, know, really getting toknow.
your suitors are is superimportant, you know, early on in
the process.
No doubt about it.
You know, a lot of times, justlike any other relationship,
you'll know pretty quickly.
Usually it's not love at firstsight, but it's, you'll, you'll
(15:14):
know if there's some chemistrythere for sure.
emily-sander_1_11-05-2024_16 (15:17):
It might be, what was that line in
My Fair Lady where it's, I'vebecome accustomed to his face.
rory-magnolialanepartners (15:24):
Yeah.
ed-barton--lawyer-_1_11-05- (15:24):
be, it should be a little bit
different than that.
you know, that, that actually,as you're going through the
private equity, as you're goingthrough the, the dating process,
the, the, the meetings, youknow, the, the, the management
rory-magnolialanepartn (15:37):
Fireside chats.
Yeah.
ed-barton--lawyer-_1_11-05- (15:39):
all the other happy stuff where
you're get, get you utilize yourinstincts a little bit too.
And look if, if.
Dealing with the private equityguys is like, it's like, you
know, going to the beach andgetting sand in your swimsuit
but they give you a good deal.
You really got to think whetherthat's a really good deal and
(16:00):
whether you can live with thosefolks for the long haul Because
it may it may be that you end uptaking a little bit less ideal
economic deal to get the rightPartnership that'll then drive
the business value
rory-magnolialanepartners (16:12):
Yeah.
Mm
ed-barton--lawyer-_1_11-05-2 (16:13):
it is it is like a hiring process.
It's like a marriage It's likeit's like all those relationship
things and view thoseexperiences during the lead up
to the close, whether it's theinitial meetings, the fireside
chats, the, the diligenceprocess as, as kind of the
dating
rory-magnolialanepartners- (16:31):
hmm.
ed-barton--lawyer-_1_11-05- (16:31):
And if you, if you're like, F this,
these guys are horrible, then,you know, I don't hesitate to
rely on your instincts there.
emily-sander_1_11-05-2024 (16:40):
Okay.
So let's play the private equitydating game.
The first date is, so there's,well, virtual data room, you've
got to build your virtual dataroom.
Okay.
Okay.
ed-barton--lawyer-_1_11-05- (16:50):
way ahead of that.
You're ahead of the gamealready.
emily-sander_1_11-05-2024 (16:53):
Okay, is that okay?
So we're not even to likebuilding our profile because
that's kind of like your
ed-barton--lawyer-_1_11- (16:58):
you're kind of building your Tinder
profile.
So, so, and that's, that's the
rory-magnolialanepartner (17:02):
You're uploading some pics, you know,
maybe a little bio.
Yeah.
ed-barton--lawyer-_1_11-05- (17:05):
you get a, they get a teaser, a
teaser will go out like a onepage teaser goes out from the,
from the, uh, from theinvestment bank.
That's like your Tinder profile.
rory-magnolialanepartners- (17:14):
Hmm.
emily-sander_1_11-05-2024_1 (17:14):
put your best picture on there.
ed-barton--lawyer-_1_11-05- (17:16):
off to like
rory-magnolialanepartners (17:17):
Yeah, that's you out on a hike.
Yeah, exactly, on a sunny day.
Yeah.
ed-barton--lawyer-_1_11-0 (17:20):
left.
They're basically going to go,yeah, not interested, not
interested, not interested, notinterested.
But every once in a while,you're going to get to swipe
right.
And that's the, the job of theinvestment bankers is to get
that out in front of as manypeople as they can and get it to
the right folks.
So you get the right peopleswiping right.
emily-sander_1_11-05-2024 (17:35):
Okay,
ed-barton--lawyer-_1_11-0 (17:36):
going to be your teaser.
emily-sander_1_11-05-2024_16 (17:37):
so what's the sim?
So like what are we talkingabout?
It's CIM
ed-barton--lawyer-_1_11-05 (17:41):
CIM, confidential information
memorandum.
emily-sander_1_11-05-2024_1 (17:44):
and that's like a one pager or like
rory-magnolialanepartners (17:46):
think about when you think
emily-sander_1_11-05-2024_16 (17:47):
or a packet.
It's like a packet ofinformation.
So
rory-magnolialanepartners-co (17:51):
on
emily-sander_1_11-05-2024_16 (17:52):
we would get sims all the time.
rory-magnolialanepartners- (17:53):
with Ed, you know, before.
Yeah.
emily-sander_1_11-05-2024_ (17:55):
100?
rory-magnolialanepart (17:56):
Hundreds.
Yeah.
Yeah.
I
emily-sander_1_11-05-2024_1 (17:57):
the best ones I see are like
rory-magnolialanepartners (17:58):
here.
emily-sander_1_11-05-2024_16 (17:59):
15 to 50 pages.
Like boom, boom, boom, just.
ed-barton--lawyer-_1_11 (18:01):
because that's because we're simple
people
emily-sander_1_11-05-2024 (18:04):
Okay.
Okay.
ed-barton--lawyer-_1_11-05- (18:06):
but no, they, so you got, you
basically have this teaser thatgoes out.
And then the SIM is the nextpiece that goes out.
So the people who get the teasergo, yeah, this, these, this,
this looks like a nice profile.
I'd like to get to know a littlebit more.
And so they go back to theinvestment banker and they go,
I'm going to sign an NDA andthen give me some more.
And then the SIM comes out andthe SIM has got some financial
(18:28):
information.
It's got more businessinformation.
You may even,
rory-magnolialanepartner (18:31):
Market analyses, yeah,
ed-barton--lawyer-_1_11-05 (18:34):
Who, who it is kind of what's kind of
what's going on with thebusiness, why they're selling.
That's, that's really like the,that's the cyber stalking piece
of, of the online datingexperience.
So now you've started toexchange text messages.
emily-sander_1_11-05-2024 (18:48):
Well, no, you haven't though.
You haven't not, you haven'tspoken to the actual company
yet.
Have you?
ed-barton--lawyer-_1_11-05- (18:54):
but you're looking at their
Instagram.
You're,
emily-sander_1_11-05-2024_16 (18:56):
So you have like their full profile
before you had like the previewpage.
rory-magnolialanepartners (18:59):
yeah.
ed-barton--lawyer-_1_1 (18:59):
checking out their Instagram, you're
checking out their Facebookpage, you've also got like a
friend in the middle, and that'sthe investment banker that's
going,
rory-magnolialanepartner (19:06):
Mutual friend, yeah, wing person.
emily-sander_1_11-05-202 (19:09):
great.
They're, you know,
ed-barton--lawyer-_1_11-05-2 (19:10):
Uh
emily-sander_1_11-05-2024 (19:10):
yeah.
ed-barton--lawyer-_1_11-05-2 (19:11):
Uh
emily-sander_1_11-05-2024 (19:12):
Okay.
And then if you make it pastthat stage, then you meet for
the first time.
ed-barton--lawyer-_1_1 (19:18):
Fireside chat.
emily-sander_1_11-05-2024 (19:19):
Iris.
I chat.
rory-magnolialanepart (19:20):
Typically just the CEO at first, actually,
of the operating business.
CEO and or founder, yeah.
emily-sander_1_11-05-2024 (19:28):
Okay.
rory-magnolialanepartne (19:28):
Because at that
emily-sander_1_11-05-2024_ (19:29):
And.
rory-magnolialanepartners-c (19:29):
you may not even, you know, really
be, you know, looping a lot ofpeople from the operating
business into the tent.
Because unless you really thinkthere's a deal to be done, it's
You're not going to get peoplespun up to, you know, take their
eye off the ball from a day today operating perspective.
So
emily-sander_1_11-05-2024 (19:48):
Don't want to distract them.
rory-magnolialanepartners-c (19:50):
has been, it's usually the CEO that
has those first conversationsand that can be a couple of
months before even the C CFOknows that there's like actual
stuff happening.
And that's just the job of theCEO.
I'll say as much as anything is,you know, um, sell product and
always be selling stock also.
Like that's what they do, youknow?
So,
ed-barton--lawyer-_1_11-0 (20:08):
Keep, keep raising
rory-magnolialanepartners- (20:10):
yep.
ed-barton--lawyer-_1_11-05- (20:10):
The virtual data room kind of going
back to your one comment, um,the virtual data room, the
assembly will start at the timeat which that initial teaser is
put together, but it continuesall the way through the process.
And really that virtual dataroom, it used to be a physical
data room.
Now it's virtual is handled bythe investment banker.
So they
rory-magnolialanepartners (20:29):
Yeah,
ed-barton--lawyer-_1_11-05 (20:30):
have a, have a setup where they can
figure out.
who goes in to see stuff, whatthey look at, and they'll give
incrementally more access as youmove through the process.
so as Rory noted, at some point,normally the CFO gets brought
into the tent next after the CEObecause they need to fill out
(20:50):
the data room.
And CFOs tend to have a lot ofthe information that's
rory-magnolialanepartners (20:54):
yeah.
ed-barton--lawyer-_1_11-05 (20:54):
fill that data room
rory-magnolialanepartners-c (20:55):
And I will say this, if you are on
top of your game, then you willhave good corporate hygiene and
you'll effectively have much ofthe information required for a
dataroom and some sort ofrepository on the system anyway.
So financial information,contract information,
information, all of thosethings, know, do yourself a
(21:16):
favor, even if you're in abusiness that, you know.
Isn't likely to necessarilytransact at any specific time,
but just Information at yourdisposal so you don't have to
recreate the wheel, you know ina rush or in a disorganized
fashion.
So oh
emily-sander_1_11-05-20 (21:34):
anyway, regardless of if you partner
with private equity, butcertainly if you do, you're,
you're ahead of the game oryou're prepared while you're not
scrambling, but it's okay.
So do a quick recap.
You have the teaser.
Um, and then you have the sim.
ed-barton--lawyer-_1_11-05 (21:47):
have the
emily-sander_1_11-05-2024_ (21:48):
then you've got the fireside chat,
and then you've got
ed-barton--lawyer-_1_11 (21:52):
access.
So
emily-sander_1_11-05-2024_ (21:52):
data room at various levels of
access.
And so you kind of go throughthat if you're like full kimono,
virtual data room, and you'remeeting with the CEO, the CFO,
and maybe some other members ofthe leadership team, that's
pretty far down
rory-magnolialanepartners-co (22:06):
at
emily-sander_1_11-05-2024_1 (22:07):
the path.
rory-magnolialanepartner (22:07):
That's a great point Emily.
That's about where you usuallystart getting first LOI's You
You know, generated by potentialbuyers through the investment
bank and sort of you havetypically a handful of
effectively offers for yourbusiness, whether stock or asset
purchase, to, to call through.
And that's sort of like whereyou start to narrow the field of
(22:30):
your dating prospects, so tospeak, and think about a
longterm relationship.
emily-sander_1_11-05-2024_1 (22:35):
Oh, man, commitment.
Okay.
rory-magnolialanepartners (22:37):
quite monogamous at this point.
It's, um, to continue thisanalogy, I guess for the rest of
the episode.
Um, You know, you're
emily-sander_1_11-05-2024_1 (22:44):
You actually want multiple.
rory-magnolialanepartners-c (22:46):
you know, actively dating with
other, other groups and youactually want them to know that
too, uh,
ed-barton--lawyer-_1_11-0 (22:52):
Yeah.
rory-magnolialanepartners-c (22:52):
for a lot of reasons.
So.
ed-barton--lawyer-_1_11-0 (22:55):
Yeah.
And I'll leave, I'll leave anyadditional comments about
corporate hygiene and anyparallels alone for the moment.
However, what I will say is agood CFO and Rory had kind of
hit on this, a good CFO.
knows, especially if you're inor contemplating a private
equity type transaction oryou're in a private equity
relationship, you're going totransact.
(23:18):
And so a good CFO is constantlykeeping their, their books,
records, all those elements thatare going into a virtual data
room ready.
So that like at a moment'snotice, they can kind of fire it
rory-magnolialanepartners (23:32):
Yeah.
ed-barton--lawyer-_1_11-05 (23:33):
it's not a super heavy lift.
And the entire organization thenused to that cadence of
providing information andloading it.
So it also doesn't tip off thatall of a sudden there's
something new, exciting and
emily-sander_1_11-05-2024 (23:44):
Yeah.
ed-barton--lawyer-_1_11 (23:45):
because the organization is used to
having that cadence ofinformation flow and providing
it up to the CEO.
And the CFO is always asking forsales pipelines
rory-magnolialanepartners-co (23:54):
Mm hmm.
ed-barton--lawyer-_1_11-0 (23:55):
these
rory-magnolialanepartners (23:55):
Yeah.
ed-barton--lawyer-_1_11-05-2 (23:55):
So Be thinking about that as a, as
a chief executive or a chieffinancial officer.
You want to have that cadence,not just during the process, but
kind of throughout the process,especially once the process
closes and you're now in privateequity land, going to transact
again, you do not, you know, togo back to the analogy, you will
not make for life in privateequity and therefore you need to
(24:17):
be prepared to, to transact andkeep that cadence up, it's much
easier that way.
And it keeps the, the antennadown for the, uh, employees and
they can focus on executingtheir jobs rather than
speculating about what thecompany's
rory-magnolialanepartner (24:30):
right.
Yeah.
ed-barton--lawyer-_1_11-0 (24:31):
looks
rory-magnolialanepartners- (24:31):
Yep.
emily-sander_1_11-05-2024 (24:32):
Okay.
So we're running through thisprocess with multiple, hopefully
multiple potential buyers.
We kind of want to let peopleknow, Hey, like I'm, I'm pretty
popular.
rory-magnolialanepartners- (24:41):
hmm.
emily-sander_1_11-05-2024_1 (24:41):
I'm hot stuff.
I got, I got options here, soyou better, you better up your
game.
And all throughout that process,all those different touch points
and phases and stages.
You're basically kind of seeinglike, do I want to take that 15
hour plane ride with this, withthis guy or gal, do I want to,
you know, Do business and bringthem on the board.
(25:02):
Do I want, like, is this someoneI can do business with?
They're of course sniffing youout as well during that whole
process.
But that's, that's the like, Idon't know, like mating dance
that you do when you're hoardinghybrid equity.
Okay.
rory-magnolialanep (25:17):
interesting.
And, um, know, they're, they'reassessing.
especially if you're the CEO,sometimes a CFO, founder, like
they're, they're assessing, youknow, your character, your, um,
forthrightness per se.
Um, and from their standpoint,can I work with this person?
(25:38):
Like, Hey, we, we have bigvisions for this business, but
how obstinate or how open mindedare they going to be to
accepting You know our expertisein this sector to make this
thing massive i.
e.
one plus one equals three kindof thing it goes both ways even
though everybody's very happyand jovial up front.
There's a there's absolutely atwo way assessment going on
(26:01):
personnel wise Yeah,
emily-sander_1_11-05-2024_1 (26:07):
you want to be in bed with, so to
speak?
Also, I mean, if you look at itfrom their perspective, if you
were about to give someonemillions of dollars, wouldn't
you want to know as much as youcan about them?
And wouldn't you want to knowwho you're doing business with?
So, it's a fair assessment.
rory-magnolialanepartners (26:21):
time,
emily-sander_1_11-05-2024_1 (26:21):
Um, on
ed-barton--lawyer-_1_11-05- (26:22):
has
emily-sander_1_11-05-2024_ (26:22):
flip side,
ed-barton--lawyer-_1_11-0 (26:23):
sign.
emily-sander_1_11-05-2024_1 (26:24):
any red flags of here who, here's
who should absolutely notpartner with private equity?
Like
ed-barton--lawyer-_1_11-05 (26:30):
him.
emily-sander_1_11-05-2024 (26:30):
these are absolutely no go situations
if you have one of these.
rory-magnolialanepartners (26:34):
Well, if you like, uh having a
ed-barton--lawyer-_1_11 (26:36):
weren't ready
rory-magnolialanepartners (26:37):
chill
ed-barton--lawyer-_1_11-05 (26:37):
They needed
rory-magnolialanepartners (26:38):
hour, 40 hour work week,
ed-barton--lawyer-_1_11-0 (26:40):
book, but
rory-magnolialanepartners- (26:41):
cash and dividends taking money out
of the business.
ed-barton--lawyer-_1_11-05- (26:44):
was frustrating.
rory-magnolialanepartners- (26:45):
It's probably not right for you.
If you like running a balancesheet that's debt free, probably
not for you.
Um, if you like, if you're notup for, um, sharing control your
business that you may have beenconceptualizing incubating,
running for 20 years, 10, 15years?
(27:06):
That could be a challenge.
You know, it could be a to thesystem if you have new players
in the game.
emily-sander_1_11-05-2024 (27:12):
Yeah.
And we've seen that.
Shocked us.
We've seen someone get likeelectrocuted in their head and
it's not pretty, but theyweren't ready for it.
They, they were.
They needed to read this book,our book, but they weren't ready
for it.
They didn't understand that.
And it was, it was frustratingbecause being on the leadership
team was like, this is justcreating drama and churn and
everything.
(27:32):
But at another level, it's kindof like this poor person who
this has been their baby fordecades and decades is now
having to get used to somethingtotally new.
rory-magnolialanepartners (27:42):
know, it's amazing.
Like,
ed-barton--lawyer-_1_11-05-2 (27:43):
of fact, I see that more
rory-magnolialanepartners (27:44):
yeah.
ed-barton--lawyer-_1_11-05- (27:45):
not
rory-magnolialanepartne (27:45):
Agreed.
ed-barton--lawyer-_1_11-05-2 (27:46):
at my career and the private equity
backed companies that I've beena part of in almost every one of
those circumstances, which isone of the reasons why we're
gathered here.
The founder has been like Whatthe heck just happened now, some
of them, uh, and again, I, I'vegot situations where some of
them, the founder goes, okay, Iget it.
(28:06):
That's fine.
That's cool.
I'm going to adjust.
I'm, I'm making thoseadjustments.
We're bringing in new folks.
I'm stepping away, you know,and, and again, we were, we were
all part of one where that waskind of the case where the
founders got to realize what wasgoing on and they stepped away.
Um, yeah.
Emily alluded to one that thetwo of us were at where that was
not the case, and it became avery contentious.
(28:27):
Um, and Rory and I were in onewhere it was contentious as
well.
And I think it's
rory-magnolialanepartners (28:30):
Yeah.
ed-barton--lawyer-_1_11-05- (28:31):
you know, that that challenge for
the founder is just recognizing,for the most part, it is the
control piece.
They're used to, has been mybaby and I'm in total control.
And that's not the case anymore.
And, um, Like I said, if you'rewell aligned on strategy and you
guys, and you can communicatewell with your private equity
partner and you guys get alongwell, it's going to be like any
(28:52):
relationship.
There's going to be bumpy times,but you'll, you'll generally be
successful.
And that's what I, that's whatI've seen in my most recent is,
you know, that, situationoccurred.
So even when it got bumpy, theywere able to work through it and
transition successfully.
In other cases, if you go intoit, cause you're trying to get
the best dollar amount, you mayend up with, you know, you're on
(29:13):
the outside looking in as thefounder because the private
equity guys will control thatsituation.
And if you're prepared for that,you know, that's fine, but
normally you're not.
rory-magnolialanepartners (29:21):
Yeah.
emily-sander_1_11-05-2024 (29:22):
Yeah,
rory-magnolialanepartners (29:23):
Yeah.
That dynamic is just sointeresting always because you
think about successful foundersand sometimes, well, I'd say
most times to be successful, youhave to be so singularly
focused, quite brilliant, and,you know, really used to
basically being top down in howyou run the business, you are
(29:44):
that person and that's whatmakes you successful.
Now, here's that conundrum tosay.
Well, for whatever reason, I'mdeciding it's time to, you know,
sell this business.
And a lot of, a lot of foundersthink that they could handle
that transition, but until youactually are in it, let's, let's
say six months into the postsale phase, Where you're now
(30:08):
operating the business under PEownership, that's when it really
starts to sink in.
There's a heck of a lot moregovernance required, there's a
heck of a lot moreadministration,
emily-sander_1_11-05-2024_ (30:17):
yeah
rory-magnolialanepartners- (30:17):
that you might not otherwise have
been used to, and you have tofind within yourself whether you
can handle that or you want to,you know.
emily-sander_1_11-05-2024 (30:24):
Well, to that point, I mean, at, at
about the six month mark,there's, there comes a point
where something happens and theybasically get told, that's not
your call.
That's not your decisionanymore.
And that just can like
rory-magnolialanepartners-com (30:37):
a second board
emily-sander_1_11-05-2 (30:37):
crumble.
rory-magnolialanepartners (30:39):
Yeah,
emily-sander_1_11-05-2024_1 (30:40):
And that's where someone can
literally just dissolve in frontof you.
And it's kind of a kick in thekick in the pants.
Um, and some people recover fromthat are like, all right.
Uh, I understand that.
Uh, here's what I always tellexecutives in this position.
You still add value to thebusiness, tremendous value.
The way you do that has changed.
rory-magnolialanepartners (30:59):
great
emily-sander_1_11-05-2024_1 (30:59):
And as soon as you can get on board
with, with that notion, it'sbetter for you.
It's better for everyone aroundyou, but people, man, they fight
that and it's hard, it's tough.
Um, but I mean, we've also seenpeople who truly genuinely are
trying to make that transition.
It's hard for them, but they'retrying to, and they eventually
get there and it's a good thing.
Yeah.
rory-magnolialanepartners (31:19):
Yeah.
I mean, you'd think, and I thinka lot of these cases where that,
where there is a, um, challengeadapting, you know, the, the
founder or the majorityshareholder thinks, you know,
um, it's all worth it for a lotof money.
And then they, they, they getthe money, um, you know, call it
most of it, some of it's earnedout, whatever, but.
(31:40):
But it's not enough.
It's, it's about more than thatto them than they even thought
it was going to be.
So that's where I think peoplestruggle is to say it.
I thought if I made tens ofmillions of dollars and took
chips off the table that I couldlive with whatever, but I can't
either.
It's an ego thing or whetherit's a control thing or just a
misalignment on vision thatyou're super passionate about
for that business.
(32:00):
So many human things involvedhere.
Again, after all, this is allhuman stuff.
You know,
ed-barton--lawyer-_1_11-0 (32:05):
Well, that's the one thing that the
most successful and you, you'vementioned it, Rory, the most
successful entrepreneurs are allin and they've been all in and
their personality is not thenormal like, well, I'm going to
diversify, I'm risk averse, I'm,you know, they're like, no, I'm
all in and I'm going to put allmy chips in the middle of the
table and keep rolling.
That's Where I've seen it, youknow, you can hand them and I
(32:28):
mean, we were, you and I were ina situation where they handed
the founder like 70 million andhe was pissed.
And he went out and did it
rory-magnolialanepartners (32:38):
Yeah.
Yeah.
ed-barton--lawyer-_1_11-05- (32:41):
the money.
I mean, it was about the money,but it wasn't about the money.
It was really about the abilityto build and to grow and to do
what they wanted to do and tochange the kind of change the
landscape for that particularindustry.
And they were driven by, by, Youknow, again, I think it's even,
it's not even ego.
It's a, it's a complete, it'slike an
rory-magnolialanepartners- (32:59):
Yes.
Yeah.
ed-barton--lawyer-_1_11-05-2 (33:00):
is that it transcends ego,
rory-magnolialanepartner (33:02):
Again.
ed-barton--lawyer-_1_11-05- (33:02):
the
rory-magnolialanepartners (33:03):
Yeah.
ed-barton--lawyer-_1_11-05- (33:03):
And you know, that's, and most
founders go through that andthat's what makes this
transition a really, reallytough transition for most
rory-magnolialanepartners (33:10):
Yeah.
emily-sander_1_11-05-2024_ (33:10):
Yes, but that is why it is good that
you are listening to the privateequity experience podcast,
because now you know what you'regetting into and you can be
armed with good information,which we will have plenty more
of in the upcoming episodes, butwe will call it a wrap for this
one.
Thank you, Ed.
Thanks, Rory.
See you next time.
ed-barton--lawyer-_1_1 (33:28):
Doodles.
If you enjoyed today's episode,please like, share, and
subscribe wherever you get yourpodcasts.
Welcome to the Private EquityExperience Podcast.
Your backstage pass to thestrategies, stories, and secrets
that drive value in the PEuniverse.
No filters, no fluff, juststraight talk and expert
insights to help you navigatethe private equity world with
confidence.
And now your hosts, Ed Barton,Rory Liebhardt, and Emily
(00:29):
Sander.
emily-sander_1_11-05-20 (00:34):
Welcome back to the private equity
experience podcast.
How's it going, Rory?
How's it going, Ed?
rory-magnolialanepartners- (00:40):
good to be back.
Good to be back.
Yeah.
emily-sander_1_11-05-2024_1 (00:42):
You got some,
ed-barton--lawyer-_1_11-05-2 (00:43):
in the neighborhood.
emily-sander_1_11-05-2024_1 (00:44):
you got some nifty headphones there,
Rory.
rory-magnolialanepartners- (00:47):
well we finally figured out my
technical difficulties it seems.
After
emily-sander_1_11-05-2024_1 (00:52):
But you've gone full circle.
Now you're like,
rory-magnolialanepartners-co (00:54):
Ha
emily-sander_1_11-05-2024 (00:54):
sound like you look like one of those
NFL announcers who's like readyto go.
Yeah,
rory-magnolialanepartners-c (00:59):
put me up there with uh, Chris
Collinsworth and you know,
emily-sander_1_11-05-2024_160 (01:03):
I love him.
He's one of my favorite.
I cannot stand fricking.
Greg Olsen and um, someone, TroyAikman, Yeah, I don't know.
But Chris, yeah, I love him.
we're here to talk about,
rory-magnolialanepartners (01:16):
Yeah.
emily-sander_1_11-05-2024_1 (01:17):
um, selling.
So why, why would a founder,want to sell?
rory-magnolialanepartners (01:22):
Yeah.
Yeah, absolutely.
So ultimately, you know, ifyou're building a business and
you know, you've bootstrapped itor maybe even taken on some, uh,
seed investment or angelinvestment at certain point in
time, You know, you've takenyour business perhaps as far as
you can take it organically.
maybe there's some mitigatingfactors if you were a founder
(01:44):
without any successors in yourfamily or something like that.
You make the decision of whetherit's time to sell and who to
sell to.
emily-sander_1_11-05-2024 (01:52):
Cool.
So.
What are some of the reasonspeople could be considering this
if you mentioned some of them,but if they're just like
retiring, they're just like,I'm, I've done what I need to do
here.
And now it's time for somethingelse to happen or
ed-barton--lawyer-_1_11-05-20 (02:04):
a lot of times, you know, what,
where, what I've seen is really,there's, there's a couple key
drivers.
The biggest key driver is a needto diversify.
The most successfulentrepreneurs pour their heart,
soul, and entire balance sheetinto their business.
And once that business hasgotten stable, and they're doing
(02:24):
fairly well, and this is wherethat, that lifestyle business to
private equity, tension comesin, they've done really well,
but they've tied up their entirelife into their business
financially, emotionally,physically.
And so they're like, look, Iwant to take some chips off the
table.
That's, that's the number
rory-magnolialanepartners (02:41):
Yeah.
ed-barton--lawyer-_1_11-05-20 (02:41):
I see that the number two reason
that I see is related to that,which is they and their partners
have tied up all their lives andit's almost like a marriage.
And every one of those, I'venever seen a partnership go for,
you know, decades and decadesand decades without tension,
just like I've never seen amarriage go decades and decades
and decades without tension.
(03:02):
And when that tension hits,depending on how they work
through it, sometimes a need tobring in a third party or fourth
party or fifth party to kind of.
Settle down the ownership groupor to take out the partner.
That's like, look, I'm, I'm, I'mdone.
And it's then they want to rideoff into the sunset and you've
(03:24):
got another partner who wants tostay and build the business.
Those
rory-magnolialanepartners (03:26):
Yeah.
ed-barton--lawyer-_1_11- (03:27):
tended to be the two drivers outside of
I need growth equity capital.
rory-magnolialanepartner (03:31):
speak.
I mean, nothing is permanent,right?
So.
You're talking about many yearsof building, building.
There's another stage to anybusiness typically.
And that's, know, um, selling orliquidating or really taking, as
Ed said, some chips off thetable.
emily-sander_1_11-05-2024 (03:51):
Yeah.
So like we've worked withseveral founders and we were,
let's talk about the ones wework with together.
Like what were the reasons theywere initially entertaining
private equity?
ed-barton--lawyer-_1_11-0 (04:03):
Well, if I go back to my first, so not
ones where Rory and I firstworked together, we had
basically angel investors builtthat business, um, that ranged
from former, former, FederalReserve Board chairman to, uh,
you know, kind of local realestate developers.
And they wanted, theyessentially were like, look,
(04:23):
we've been in for 10
rory-magnolialanepartner (04:24):
Right.
ed-barton--lawyer-_1_11-05- (04:24):
has gone
rory-magnolialanepartners- (04:25):
Yep.
ed-barton--lawyer-_1_11-0 (04:26):
We're going to take our money off the
table and you need institutionalmoney.
So that's was why our firstprivate equity deal got got done
was a business had grown to thepoint where the angels wanted
out or the seed investors wantedout and they wanted to be
replaced.
They wanted to monetize and thefounder did not want to exit at
that point.
So a majority of the businesswas sold to private equity.
(04:49):
Um, and then the subsequent salethere was the founders and the
private equity.
team weren't getting along.
rory-magnolialanepartner (04:57):
Right.
Yep.
Yep.
Yeah.
ed-barton--lawyer-_1_11-0 (05:04):
their value was to sell the entire
business.
And when I think, you know, theyhad drag rights, so they
basically could force the othershareholders to sell, including
the founder that they were like,we want to get out we'll sell
our portion, but we actually canmake more if we sell the whole
business.
So they sold the whole business.
emily-sander_1_11-05-2024 (05:23):
okay.
So let's get into drag rightsand tag rights.
what is that?
ed-barton--lawyer-_1_11-05-2 (05:28):
So drag rights are when, and
normally it's a private equityguys that put this in the, put
this in the, uh, in the deal.
it's essentially says, look, if,We go to sell our portion of the
business.
We can drag you along with us sowe can force you to sell at the
same terms as we're getting forour sales.
(05:48):
So normally it's the drag rightsinclude a, and it's at the same
terms or conditions.
Again, we've talked aboutwaterfalls.
And so, you know, they're,whatever is in that category of
the waterfall, they get treatedthe same, but they're forced to
sell.
They don't have a choice.
Tag rights are when the privateequity guys go, we're going to
sell our 40 percent or 50percent or 60 percent and the
(06:09):
founder or whoever the othershareholders go, going to sell
too.
And so we're going to tag ontothat sale.
And if you're going to sell 60%,you could only sell your
proportional interest becausewe're going to sell our
proportional interest as
emily-sander_1_11-05-2024_16 (06:21):
So why are drag rights beneficial
to the PE firm?
ed-barton--lawyer-_1_11 (06:26):
Because that way they can force a sale
of the entire business.
And so a buyer is notnecessarily stuck with minority
shareholders
rory-magnolialanepartners (06:36):
Yeah.
It's
emily-sander_1_11-05-2024_ (06:36):
It's cleaner.
rory-magnolialanepartners-c (06:37):
one of those things where, you know,
you, you negotiate a deal, uh,and it's.
ed-barton--lawyer-_1_11-05-2 (06:42):
ha
rory-magnolialanepar (06:46):
litigation not to say that Drag rights
aren't litigated.
They routinely are but if youhave an understanding at the
time You acquire a business withfrom whom you bought it from um
You you can avoid that down theroad.
That's just like any othercontractual term You try to get
things out on the table andagreed to stuff hits the fan.
(07:08):
Um
emily-sander_1_11-05-2024 (07:09):
Okay.
Okay.
So it's just cleaner.
Like when you're trying to dodeals, like it's the whole
company is being sold or goingwith, going with you.
Okay.
So what's the advantage of tagrights?
The opposite direction then.
rory-magnolialanepartners (07:22):
Well, just as if you're, if you're a,
another shareholder, minorityshareholder, then you have the
opportunity to get in on thesame deal that the PE group
who's selling perhaps themajority share of their interest
in the businesses.
And, you know, riding thecoattails one way to put it,
but, you know.
You're, you're, you're basicallytagging along to somebody that's
(07:45):
got a vested interest inmaximizing the value of their
deal.
emily-sander_1_11-05-2024_ (07:49):
When would a PE firm want to leave
someone behind where someone'slike, no tag, I'm tagging on
like that's, I want to come withyou.
rory-magnolialanepartners (07:55):
Well, there could be any number of
reasons that maybe, maybe it'sjust time to sell, um, their,
their fund, the private equityfund itself.
Is, you know, past its primetime to liquidate, um, time to
go raise another fund.
So, I mean, one of the things wetalked about in previous episode
and certainly speak a lot to inthe book is like the sequential
(08:15):
timing of funds.
And, you know, that could be onereason.
It's just like, Hey, it's timeto, it's time to time to
liquidate, you know?
So, and there's not, unless youhave that tag, right.
There's nothing that compels thePE group to.
the entire company as opposed totheir share in the company
emily-sander_1_11-05-2024 (08:36):
Okay.
So that's.
Scenario based, which makessense, but sometimes the P is
like, I would rather you juststay behind here and we exit.
rory-magnolialanepartners- (08:45):
I've seen drag rights You know
Enforced way more than tagrights I don't hear a lot about
tag rights being a thing becauseusually as you said Emily I
mean, there's usually alignmentbetween the selling parties and
you're on the same page, butrights is one where I have
personally experienced it wherethat happens
emily-sander_1_11-05-2024 (09:06):
Okay.
So drag and tag rights are termsand conditions that one would
include, or I was not trying tohave not included in the overall
agreement between founderscompanies and the PE firm.
So that's just, that's wherethat comes into play.
rory-magnolialanepartners (09:23):
Yeah,
emily-sander_1_11-05-2024_1 (09:23):
And then you mentioned the waterfall
and we have mentioned thatbefore, but that's super
important.
So I just wanted to.
Make that clear, like the, the,the waterfall is the, how would
you describe this?
Like the, the sequence or theorder at which people get paid
out.
ed-barton--lawyer-_1_11-05 (09:37):
Yep.
emily-sander_1_11-05-2024_ (09:38):
it's very important to know what the
waterfall
ed-barton--lawyer-_1_11-05-20 (09:40):
a
emily-sander_1_11-05-2024_1 (09:40):
is.
ed-barton--lawyer-_1_11- (09:41):
sells, um, or when there's a
distribution of cash out of thecompany, So it may not need to
sell, it just may be thatthere's excess cash to
distribute.
an order.
in which that's done.
And normally that starts withsenior debt, then mezzanine
debt, then preferred, uh,preferred dividends, then
(10:01):
preferred stock, then common andoption holders are at the
bottom.
So it essentially says untilthese folks are paid off and a
waterfall is, is all spelled outin the combination of the
operating agreement for the, forthe company and the deal terms.
when you enter into the deal.
So you're going to have kind ofa couple docs to look at, but it
(10:23):
essentially spells out the, foreach dollar who gets that
dollar.
And when they're paid off, thenit waterfalls cascades down to
the next layer and then they getpaid off.
Then it cascades down to thenext layer until at the very
bottom is normally your employeeoption holders and warrant
holders and kind of the.
(10:44):
The folks who actually generateda lot of that
emily-sander_1_11-05-2024_1 (10:46):
But depending on the source of the
waterfall, there could be nowater at the end or it could be
like a baby trickle.
ed-barton--lawyer-_1_11-05-2 (10:54):
Oh
rory-magnolialanepartners-c (10:54):
Oh, yeah, that's absolutely true
Yeah,
ed-barton--lawyer-_1_11-0 (11:02):
There was nothing, there wasn't even a
trickle, there was nothing.
emily-sander_1_11-05-2024 (11:06):
Well, and we've been in situations, we
won't name names necessarily,but some very savvy founders who
said, no, we want to be, uh,preferred, uh, at the preferred
level
ed-barton--lawyer-_1_11-05 (11:17):
Yep.
emily-sander_1_11-05-2024_ (11:18):
what they, what,
ed-barton--lawyer-_1_11-0 (11:19):
going to, we're going to, if you're
investing in our company, we'regoing to be pari passu.
We're going to be exactly thesame as you are.
So we're going to sit side byside with you on the waterfall.
And then at the bottom of thewaterfall is going to be the
employee options.
So
emily-sander_1_11-05-2024 (11:34):
yeah,
ed-barton--lawyer-_1_11-05- (11:35):
sat right next to the private equity
folks and that, you know,
emily-sander_1_11-05-2024_1 (11:38):
but that's not normal though.
ed-barton--lawyer-_1_11-05- (11:39):
No, that's not.
Um, but they
emily-sander_1_11-05-2024_ (11:41):
They knew, they knew about that.
ed-barton--lawyer-_1_11-05 (11:42):
knew about it and they negotiated
rory-magnolialanepartners-co (11:43):
So that kind of speaks back to the,
you know, one of the firstquestions is why, why, why do
you sell your business?
And I guess I would say one ofthe things we didn't talk about,
we should, is this the simplefact of sometimes a founder is
convinced it's time to sell abusiness.
That's what private equitygroups do is they go, um,
develop relationships.
They go, um, search forbusinesses that are at a certain
(12:04):
point in their life cycle.
And, you know, they, they, theyeffectively can tell a story to
the founder.
And a lot of times it's true,uh, and, and talk about the
potential for their business.
If they do certain things thatmay be outside of what the
founder, thinks about, you know,or even conceives because, know,
they're busy running thebusiness day to day.
(12:25):
Maybe, maybe they don't have thevision, um, of the market, maybe
that a private equity groupdoes.
So, I mean, that's, that's tosay that.
You know, some of these dealsare just like any other deals
where, you know, there's twoparties coming together having a
discussion and they think 1 plus1 can equal 3 and so they decide
to lock arms and do it, youknow?
Like, it's, that's
emily-sander_1_11-05-2024 (12:44):
Yeah.
Besides the waterfall structure,what should a founder be
thinking about when they'reevaluating private equity as an
option?
I mean, we talked about some ofthe most common reasons, but if
someone's, you know, listeningand saying, all right, I kind of
have a sense of what this thingis, there's a lot of different
PE firms out there.
I want to make sure it's a goodmatch.
(13:04):
Like, how do I, like, what do Ilook for?
ed-barton--lawyer-_1_11-05-2 (13:07):
a, that's like a six episode
series.
Um, but the, the one I, youknow, outside of the economics
and, and kind of the, the dealterms and conditions, which are
going to be things that you'regoing to want to negotiate out
with any, um, private equity,uh, partner, there's two
elements that I think areabsolutely critical when you're
getting, when you're gettinginto a deal with private equity
(13:29):
team.
The first one is, are you reallyaligned on what the strategy is?
not the BS, you know, Yeah, Iagree, but I'll just deal with
it later.
They're never going to kick meout.
They're got, you know, well, youreally aligned?
And then the second piece, andthis is, this is almost as
important, is think about yourhiring as a CEO, your hiring
(13:53):
board members.
And use some of the samecriteria that you would use when
you're hiring key
rory-magnolialanepartners- (14:00):
Hmm?
ed-barton--lawyer-_1_11- (14:01):
staff, when you're partnering with your
private equity firm.
So, are these folks, are theysmarter than me?
Are they going to add value?
Are they going to bringsomething unique?
Are they going to strengthen mymanagement team?
Are they folks that I could siton a plane with for 12 hours and
fly to Dubai and not want to,you throttle them the entire
way.
And if you can answer yes tothose things, so you go, look,
I'd hire these, these guys forthis executive team.
(14:24):
And we're aligned on thestrategy.
You're probably outside of thedeal terms.
You've probably got thosesubjective items fairly well
rory-magnolialanepartners (14:31):
Yeah.
I mean, not to be, you know, toosimplistic here, but do they
understand your business and,you know, talk about alignment
on strategy.
That's one thing, but really dothey understand, you know, the
nuts and bolts of the businessthe way that you do?
And maybe the answer is no, andit's still okay.
But if it's yes, and you reallyhave that mutual understanding,
(14:53):
it can be extremely fruitfulpartnership, you know?
Um, so, know, really getting toknow.
your suitors are is superimportant, you know, early on in
the process.
No doubt about it.
You know, a lot of times, justlike any other relationship,
you'll know pretty quickly.
Usually it's not love at firstsight, but it's, you'll, you'll
(15:14):
know if there's some chemistrythere for sure.
emily-sander_1_11-05-2024_16 (15:17):
It might be, what was that line in
My Fair Lady where it's, I'vebecome accustomed to his face.
rory-magnolialanepartners (15:24):
Yeah.
ed-barton--lawyer-_1_11-05- (15:24):
be, it should be a little bit
different than that.
you know, that, that actually,as you're going through the
private equity, as you're goingthrough the, the dating process,
the, the, the meetings, youknow, the, the, the management
rory-magnolialanepartn (15:37):
Fireside chats.
Yeah.
ed-barton--lawyer-_1_11-05- (15:39):
all the other happy stuff where
you're get, get you utilize yourinstincts a little bit too.
And look if, if.
Dealing with the private equityguys is like, it's like, you
know, going to the beach andgetting sand in your swimsuit
but they give you a good deal.
You really got to think whetherthat's a really good deal and
(16:00):
whether you can live with thosefolks for the long haul Because
it may it may be that you end uptaking a little bit less ideal
economic deal to get the rightPartnership that'll then drive
the business value
rory-magnolialanepartners (16:12):
Yeah.
Mm
ed-barton--lawyer-_1_11-05-2 (16:13):
it is it is like a hiring process.
It's like a marriage It's likeit's like all those relationship
things and view thoseexperiences during the lead up
to the close, whether it's theinitial meetings, the fireside
chats, the, the diligenceprocess as, as kind of the
dating
rory-magnolialanepartners- (16:31):
hmm.
ed-barton--lawyer-_1_11-05- (16:31):
And if you, if you're like, F this,
these guys are horrible, then,you know, I don't hesitate to
rely on your instincts there.
emily-sander_1_11-05-2024 (16:40):
Okay.
So let's play the private equitydating game.
The first date is, so there's,well, virtual data room, you've
got to build your virtual dataroom.
Okay.
Okay.
ed-barton--lawyer-_1_11-05- (16:50):
way ahead of that.
You're ahead of the gamealready.
emily-sander_1_11-05-2024 (16:53):
Okay, is that okay?
So we're not even to likebuilding our profile because
that's kind of like your
ed-barton--lawyer-_1_11- (16:58):
you're kind of building your Tinder
profile.
So, so, and that's, that's the
rory-magnolialanepartner (17:02):
You're uploading some pics, you know,
maybe a little bio.
Yeah.
ed-barton--lawyer-_1_11-05- (17:05):
you get a, they get a teaser, a
teaser will go out like a onepage teaser goes out from the,
from the, uh, from theinvestment bank.
That's like your Tinder profile.
rory-magnolialanepartners- (17:14):
Hmm.
emily-sander_1_11-05-2024_1 (17:14):
put your best picture on there.
ed-barton--lawyer-_1_11-05- (17:16):
off to like
rory-magnolialanepartners (17:17):
Yeah, that's you out on a hike.
Yeah, exactly, on a sunny day.
Yeah.
ed-barton--lawyer-_1_11-0 (17:20):
left.
They're basically going to go,yeah, not interested, not
interested, not interested, notinterested.
But every once in a while,you're going to get to swipe
right.
And that's the, the job of theinvestment bankers is to get
that out in front of as manypeople as they can and get it to
the right folks.
So you get the right peopleswiping right.
emily-sander_1_11-05-2024 (17:35):
Okay,
ed-barton--lawyer-_1_11-0 (17:36):
going to be your teaser.
emily-sander_1_11-05-2024_16 (17:37):
so what's the sim?
So like what are we talkingabout?
It's CIM
ed-barton--lawyer-_1_11-05 (17:41):
CIM, confidential information
memorandum.
emily-sander_1_11-05-2024_1 (17:44):
and that's like a one pager or like
rory-magnolialanepartners (17:46):
think about when you think
emily-sander_1_11-05-2024_16 (17:47):
or a packet.
It's like a packet ofinformation.
So
rory-magnolialanepartners-co (17:51):
on
emily-sander_1_11-05-2024_16 (17:52):
we would get sims all the time.
rory-magnolialanepartners- (17:53):
with Ed, you know, before.
Yeah.
emily-sander_1_11-05-2024_ (17:55):
100?
rory-magnolialanepart (17:56):
Hundreds.
Yeah.
Yeah.
I
emily-sander_1_11-05-2024_1 (17:57):
the best ones I see are like
rory-magnolialanepartners (17:58):
here.
emily-sander_1_11-05-2024_16 (17:59):
15 to 50 pages.
Like boom, boom, boom, just.
ed-barton--lawyer-_1_11 (18:01):
because that's because we're simple
people
emily-sander_1_11-05-2024 (18:04):
Okay.
Okay.
ed-barton--lawyer-_1_11-05- (18:06):
but no, they, so you got, you
basically have this teaser thatgoes out.
And then the SIM is the nextpiece that goes out.
So the people who get the teasergo, yeah, this, these, this,
this looks like a nice profile.
I'd like to get to know a littlebit more.
And so they go back to theinvestment banker and they go,
I'm going to sign an NDA andthen give me some more.
And then the SIM comes out andthe SIM has got some financial
(18:28):
information.
It's got more businessinformation.
You may even,
rory-magnolialanepartner (18:31):
Market analyses, yeah,
ed-barton--lawyer-_1_11-05 (18:34):
Who, who it is kind of what's kind of
what's going on with thebusiness, why they're selling.
That's, that's really like the,that's the cyber stalking piece
of, of the online datingexperience.
So now you've started toexchange text messages.
emily-sander_1_11-05-2024 (18:48):
Well, no, you haven't though.
You haven't not, you haven'tspoken to the actual company
yet.
Have you?
ed-barton--lawyer-_1_11-05- (18:54):
but you're looking at their
Instagram.
You're,
emily-sander_1_11-05-2024_16 (18:56):
So you have like their full profile
before you had like the previewpage.
rory-magnolialanepartners (18:59):
yeah.
ed-barton--lawyer-_1_1 (18:59):
checking out their Instagram, you're
checking out their Facebookpage, you've also got like a
friend in the middle, and that'sthe investment banker that's
going,
rory-magnolialanepartner (19:06):
Mutual friend, yeah, wing person.
emily-sander_1_11-05-202 (19:09):
great.
They're, you know,
ed-barton--lawyer-_1_11-05-2 (19:10):
Uh
emily-sander_1_11-05-2024 (19:10):
yeah.
ed-barton--lawyer-_1_11-05-2 (19:11):
Uh
emily-sander_1_11-05-2024 (19:12):
Okay.
And then if you make it pastthat stage, then you meet for
the first time.
ed-barton--lawyer-_1_1 (19:18):
Fireside chat.
emily-sander_1_11-05-2024 (19:19):
Iris.
I chat.
rory-magnolialanepart (19:20):
Typically just the CEO at first, actually,
of the operating business.
CEO and or founder, yeah.
emily-sander_1_11-05-2024 (19:28):
Okay.
rory-magnolialanepartne (19:28):
Because at that
emily-sander_1_11-05-2024_ (19:29):
And.
rory-magnolialanepartners-c (19:29):
you may not even, you know, really
be, you know, looping a lot ofpeople from the operating
business into the tent.
Because unless you really thinkthere's a deal to be done, it's
You're not going to get peoplespun up to, you know, take their
eye off the ball from a day today operating perspective.
So
emily-sander_1_11-05-2024 (19:48):
Don't want to distract them.
rory-magnolialanepartners-c (19:50):
has been, it's usually the CEO that
has those first conversationsand that can be a couple of
months before even the C CFOknows that there's like actual
stuff happening.
And that's just the job of theCEO.
I'll say as much as anything is,you know, um, sell product and
always be selling stock also.
Like that's what they do, youknow?
So,
ed-barton--lawyer-_1_11-0 (20:08):
Keep, keep raising
rory-magnolialanepartners- (20:10):
yep.
ed-barton--lawyer-_1_11-05- (20:10):
The virtual data room kind of going
back to your one comment, um,the virtual data room, the
assembly will start at the timeat which that initial teaser is
put together, but it continuesall the way through the process.
And really that virtual dataroom, it used to be a physical
data room.
Now it's virtual is handled bythe investment banker.
So they
rory-magnolialanepartners (20:29):
Yeah,
ed-barton--lawyer-_1_11-05 (20:30):
have a, have a setup where they can
figure out.
who goes in to see stuff, whatthey look at, and they'll give
incrementally more access as youmove through the process.
so as Rory noted, at some point,normally the CFO gets brought
into the tent next after the CEObecause they need to fill out
(20:50):
the data room.
And CFOs tend to have a lot ofthe information that's
rory-magnolialanepartners (20:54):
yeah.
ed-barton--lawyer-_1_11-05 (20:54):
fill that data room
rory-magnolialanepartners-c (20:55):
And I will say this, if you are on
top of your game, then you willhave good corporate hygiene and
you'll effectively have much ofthe information required for a
dataroom and some sort ofrepository on the system anyway.
So financial information,contract information,
information, all of thosethings, know, do yourself a
(21:16):
favor, even if you're in abusiness that, you know.
Isn't likely to necessarilytransact at any specific time,
but just Information at yourdisposal so you don't have to
recreate the wheel, you know ina rush or in a disorganized
fashion.
So oh
emily-sander_1_11-05-20 (21:34):
anyway, regardless of if you partner
with private equity, butcertainly if you do, you're,
you're ahead of the game oryou're prepared while you're not
scrambling, but it's okay.
So do a quick recap.
You have the teaser.
Um, and then you have the sim.
ed-barton--lawyer-_1_11-05 (21:47):
have the
emily-sander_1_11-05-2024_ (21:48):
then you've got the fireside chat,
and then you've got
ed-barton--lawyer-_1_11 (21:52):
access.
So
emily-sander_1_11-05-2024_ (21:52):
data room at various levels of
access.
And so you kind of go throughthat if you're like full kimono,
virtual data room, and you'remeeting with the CEO, the CFO,
and maybe some other members ofthe leadership team, that's
pretty far down
rory-magnolialanepartners-co (22:06):
at
emily-sander_1_11-05-2024_1 (22:07):
the path.
rory-magnolialanepartner (22:07):
That's a great point Emily.
That's about where you usuallystart getting first LOI's You
You know, generated by potentialbuyers through the investment
bank and sort of you havetypically a handful of
effectively offers for yourbusiness, whether stock or asset
purchase, to, to call through.
And that's sort of like whereyou start to narrow the field of
(22:30):
your dating prospects, so tospeak, and think about a
longterm relationship.
emily-sander_1_11-05-2024_1 (22:35):
Oh, man, commitment.
Okay.
rory-magnolialanepartners (22:37):
quite monogamous at this point.
It's, um, to continue thisanalogy, I guess for the rest of
the episode.
Um, You know, you're
emily-sander_1_11-05-2024_1 (22:44):
You actually want multiple.
rory-magnolialanepartners-c (22:46):
you know, actively dating with
other, other groups and youactually want them to know that
too, uh,
ed-barton--lawyer-_1_11-0 (22:52):
Yeah.
rory-magnolialanepartners-c (22:52):
for a lot of reasons.
So.
ed-barton--lawyer-_1_11-0 (22:55):
Yeah.
And I'll leave, I'll leave anyadditional comments about
corporate hygiene and anyparallels alone for the moment.
However, what I will say is agood CFO and Rory had kind of
hit on this, a good CFO.
knows, especially if you're inor contemplating a private
equity type transaction oryou're in a private equity
relationship, you're going totransact.
(23:18):
And so a good CFO is constantlykeeping their, their books,
records, all those elements thatare going into a virtual data
room ready.
So that like at a moment'snotice, they can kind of fire it
rory-magnolialanepartners (23:32):
Yeah.
ed-barton--lawyer-_1_11-05 (23:33):
it's not a super heavy lift.
And the entire organization thenused to that cadence of
providing information andloading it.
So it also doesn't tip off thatall of a sudden there's
something new, exciting and
emily-sander_1_11-05-2024 (23:44):
Yeah.
ed-barton--lawyer-_1_11 (23:45):
because the organization is used to
having that cadence ofinformation flow and providing
it up to the CEO.
And the CFO is always asking forsales pipelines
rory-magnolialanepartners-co (23:54):
Mm hmm.
ed-barton--lawyer-_1_11-0 (23:55):
these
rory-magnolialanepartners (23:55):
Yeah.
ed-barton--lawyer-_1_11-05-2 (23:55):
So Be thinking about that as a, as
a chief executive or a chieffinancial officer.
You want to have that cadence,not just during the process, but
kind of throughout the process,especially once the process
closes and you're now in privateequity land, going to transact
again, you do not, you know, togo back to the analogy, you will
not make for life in privateequity and therefore you need to
(24:17):
be prepared to, to transact andkeep that cadence up, it's much
easier that way.
And it keeps the, the antennadown for the, uh, employees and
they can focus on executingtheir jobs rather than
speculating about what thecompany's
rory-magnolialanepartner (24:30):
right.
Yeah.
ed-barton--lawyer-_1_11-0 (24:31):
looks
rory-magnolialanepartners- (24:31):
Yep.
emily-sander_1_11-05-2024 (24:32):
Okay.
So we're running through thisprocess with multiple, hopefully
multiple potential buyers.
We kind of want to let peopleknow, Hey, like I'm, I'm pretty
popular.
rory-magnolialanepartners- (24:41):
hmm.
emily-sander_1_11-05-2024_1 (24:41):
I'm hot stuff.
I got, I got options here, soyou better, you better up your
game.
And all throughout that process,all those different touch points
and phases and stages.
You're basically kind of seeinglike, do I want to take that 15
hour plane ride with this, withthis guy or gal, do I want to,
you know, Do business and bringthem on the board.
(25:02):
Do I want, like, is this someoneI can do business with?
They're of course sniffing youout as well during that whole
process.
But that's, that's the like, Idon't know, like mating dance
that you do when you're hoardinghybrid equity.
Okay.
rory-magnolialanep (25:17):
interesting.
And, um, know, they're, they'reassessing.
especially if you're the CEO,sometimes a CFO, founder, like
they're, they're assessing, youknow, your character, your, um,
forthrightness per se.
Um, and from their standpoint,can I work with this person?
(25:38):
Like, Hey, we, we have bigvisions for this business, but
how obstinate or how open mindedare they going to be to
accepting You know our expertisein this sector to make this
thing massive i.
e.
one plus one equals three kindof thing it goes both ways even
though everybody's very happyand jovial up front.
There's a there's absolutely atwo way assessment going on
(26:01):
personnel wise Yeah,
emily-sander_1_11-05-2024_1 (26:07):
you want to be in bed with, so to
speak?
Also, I mean, if you look at itfrom their perspective, if you
were about to give someonemillions of dollars, wouldn't
you want to know as much as youcan about them?
And wouldn't you want to knowwho you're doing business with?
So, it's a fair assessment.
rory-magnolialanepartners (26:21):
time,
emily-sander_1_11-05-2024_1 (26:21):
Um, on
ed-barton--lawyer-_1_11-05- (26:22):
has
emily-sander_1_11-05-2024_ (26:22):
flip side,
ed-barton--lawyer-_1_11-0 (26:23):
sign.
emily-sander_1_11-05-2024_1 (26:24):
any red flags of here who, here's
who should absolutely notpartner with private equity?
Like
ed-barton--lawyer-_1_11-05 (26:30):
him.
emily-sander_1_11-05-2024 (26:30):
these are absolutely no go situations
if you have one of these.
rory-magnolialanepartners (26:34):
Well, if you like, uh having a
ed-barton--lawyer-_1_11 (26:36):
weren't ready
rory-magnolialanepartners (26:37):
chill
ed-barton--lawyer-_1_11-05 (26:37):
They needed
rory-magnolialanepartners (26:38):
hour, 40 hour work week,
ed-barton--lawyer-_1_11-0 (26:40):
book, but
rory-magnolialanepartners- (26:41):
cash and dividends taking money out
of the business.
ed-barton--lawyer-_1_11-05- (26:44):
was frustrating.
rory-magnolialanepartners- (26:45):
It's probably not right for you.
If you like running a balancesheet that's debt free, probably
not for you.
Um, if you like, if you're notup for, um, sharing control your
business that you may have beenconceptualizing incubating,
running for 20 years, 10, 15years?
(27:06):
That could be a challenge.
You know, it could be a to thesystem if you have new players
in the game.
emily-sander_1_11-05-2024 (27:12):
Yeah.
And we've seen that.
Shocked us.
We've seen someone get likeelectrocuted in their head and
it's not pretty, but theyweren't ready for it.
They, they were.
They needed to read this book,our book, but they weren't ready
for it.
They didn't understand that.
And it was, it was frustratingbecause being on the leadership
team was like, this is justcreating drama and churn and
everything.
(27:32):
But at another level, it's kindof like this poor person who
this has been their baby fordecades and decades is now
having to get used to somethingtotally new.
rory-magnolialanepartners (27:42):
know, it's amazing.
Like,
ed-barton--lawyer-_1_11-05-2 (27:43):
of fact, I see that more
rory-magnolialanepartners (27:44):
yeah.
ed-barton--lawyer-_1_11-05- (27:45):
not
rory-magnolialanepartne (27:45):
Agreed.
ed-barton--lawyer-_1_11-05-2 (27:46):
at my career and the private equity
backed companies that I've beena part of in almost every one of
those circumstances, which isone of the reasons why we're
gathered here.
The founder has been like Whatthe heck just happened now, some
of them, uh, and again, I, I'vegot situations where some of
them, the founder goes, okay, Iget it.
(28:06):
That's fine.
That's cool.
I'm going to adjust.
I'm, I'm making thoseadjustments.
We're bringing in new folks.
I'm stepping away, you know,and, and again, we were, we were
all part of one where that waskind of the case where the
founders got to realize what wasgoing on and they stepped away.
Um, yeah.
Emily alluded to one that thetwo of us were at where that was
not the case, and it became avery contentious.
(28:27):
Um, and Rory and I were in onewhere it was contentious as
well.
And I think it's
rory-magnolialanepartners (28:30):
Yeah.
ed-barton--lawyer-_1_11-05- (28:31):
you know, that that challenge for
the founder is just recognizing,for the most part, it is the
control piece.
They're used to, has been mybaby and I'm in total control.
And that's not the case anymore.
And, um, Like I said, if you'rewell aligned on strategy and you
guys, and you can communicatewell with your private equity
partner and you guys get alongwell, it's going to be like any
(28:52):
relationship.
There's going to be bumpy times,but you'll, you'll generally be
successful.
And that's what I, that's whatI've seen in my most recent is,
you know, that, situationoccurred.
So even when it got bumpy, theywere able to work through it and
transition successfully.
In other cases, if you go intoit, cause you're trying to get
the best dollar amount, you mayend up with, you know, you're on
(29:13):
the outside looking in as thefounder because the private
equity guys will control thatsituation.
And if you're prepared for that,you know, that's fine, but
normally you're not.
rory-magnolialanepartners (29:21):
Yeah.
emily-sander_1_11-05-2024 (29:22):
Yeah,
rory-magnolialanepartners (29:23):
Yeah.
That dynamic is just sointeresting always because you
think about successful foundersand sometimes, well, I'd say
most times to be successful, youhave to be so singularly
focused, quite brilliant, and,you know, really used to
basically being top down in howyou run the business, you are
(29:44):
that person and that's whatmakes you successful.
Now, here's that conundrum tosay.
Well, for whatever reason, I'mdeciding it's time to, you know,
sell this business.
And a lot of, a lot of foundersthink that they could handle
that transition, but until youactually are in it, let's, let's
say six months into the postsale phase, Where you're now
(30:08):
operating the business under PEownership, that's when it really
starts to sink in.
There's a heck of a lot moregovernance required, there's a
heck of a lot moreadministration,
emily-sander_1_11-05-2024_ (30:17):
yeah
rory-magnolialanepartners- (30:17):
that you might not otherwise have
been used to, and you have tofind within yourself whether you
can handle that or you want to,you know.
emily-sander_1_11-05-2024 (30:24):
Well, to that point, I mean, at, at
about the six month mark,there's, there comes a point
where something happens and theybasically get told, that's not
your call.
That's not your decisionanymore.
And that just can like
rory-magnolialanepartners-com (30:37):
a second board
emily-sander_1_11-05-2 (30:37):
crumble.
rory-magnolialanepartners (30:39):
Yeah,
emily-sander_1_11-05-2024_1 (30:40):
And that's where someone can
literally just dissolve in frontof you.
And it's kind of a kick in thekick in the pants.
Um, and some people recover fromthat are like, all right.
Uh, I understand that.
Uh, here's what I always tellexecutives in this position.
You still add value to thebusiness, tremendous value.
The way you do that has changed.
rory-magnolialanepartners (30:59):
great
emily-sander_1_11-05-2024_1 (30:59):
And as soon as you can get on board
with, with that notion, it'sbetter for you.
It's better for everyone aroundyou, but people, man, they fight
that and it's hard, it's tough.
Um, but I mean, we've also seenpeople who truly genuinely are
trying to make that transition.
It's hard for them, but they'retrying to, and they eventually
get there and it's a good thing.
Yeah.
rory-magnolialanepartners (31:19):
Yeah.
I mean, you'd think, and I thinka lot of these cases where that,
where there is a, um, challengeadapting, you know, the, the
founder or the majorityshareholder thinks, you know,
um, it's all worth it for a lotof money.
And then they, they, they getthe money, um, you know, call it
most of it, some of it's earnedout, whatever, but.
(31:40):
But it's not enough.
It's, it's about more than thatto them than they even thought
it was going to be.
So that's where I think peoplestruggle is to say it.
I thought if I made tens ofmillions of dollars and took
chips off the table that I couldlive with whatever, but I can't
either.
It's an ego thing or whetherit's a control thing or just a
misalignment on vision thatyou're super passionate about
for that business.
(32:00):
So many human things involvedhere.
Again, after all, this is allhuman stuff.
You know,
ed-barton--lawyer-_1_11-0 (32:05):
Well, that's the one thing that the
most successful and you, you'vementioned it, Rory, the most
successful entrepreneurs are allin and they've been all in and
their personality is not thenormal like, well, I'm going to
diversify, I'm risk averse, I'm,you know, they're like, no, I'm
all in and I'm going to put allmy chips in the middle of the
table and keep rolling.
That's Where I've seen it, youknow, you can hand them and I
(32:28):
mean, we were, you and I were ina situation where they handed
the founder like 70 million andhe was pissed.
And he went out and did it
rory-magnolialanepartners (32:38):
Yeah.
Yeah.
ed-barton--lawyer-_1_11-05- (32:41):
the money.
I mean, it was about the money,but it wasn't about the money.
It was really about the abilityto build and to grow and to do
what they wanted to do and tochange the kind of change the
landscape for that particularindustry.
And they were driven by, by, Youknow, again, I think it's even,
it's not even ego.
It's a, it's a complete, it'slike an
rory-magnolialanepartners- (32:59):
Yes.
Yeah.
ed-barton--lawyer-_1_11-05-2 (33:00):
is that it transcends ego,
rory-magnolialanepartner (33:02):
Again.
ed-barton--lawyer-_1_11-05- (33:02):
the
rory-magnolialanepartners (33:03):
Yeah.
ed-barton--lawyer-_1_11-05- (33:03):
And you know, that's, and most
founders go through that andthat's what makes this
transition a really, reallytough transition for most
rory-magnolialanepartners (33:10):
Yeah.
emily-sander_1_11-05-2024_ (33:10):
Yes, but that is why it is good that
you are listening to the privateequity experience podcast,
because now you know what you'regetting into and you can be
armed with good information,which we will have plenty more
of in the upcoming episodes, butwe will call it a wrap for this
one.
Thank you, Ed.
Thanks, Rory.
See you next time.
ed-barton--lawyer-_1_1 (33:28):
Doodles.
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