How do you grow EBITDA from $8M to $100M in 7 years?

Episode 115 - Eric Wiklendt Transcript Jason Kirby (09:52.239) Hey, everyone. Welcome back to $100 million Exits. Today, we have Eric Wicklund with us, a partner and managing director at Spaceside Equity, a firm that is notable for creating value out of deals that might have been overlooked, specifically in the manufacturing space. Eric, I would love for you to just... Go straight into the story of how the firm got started with its first deal and kind of how that led to the subsequent deals that you guys have and the fun that you guys have today. Eric Wiklendt (10:30.603) Yeah, thanks a lot for having me, Jason. Yeah, the story of Space Side, the origin story is one of entrepreneurship by acquisition. So my partner, Kevin Doherty, started the firm about 20 years ago. And it was a situation where he was working at PricewaterhouseCoopers and a client of his asked him about potentially buying a company they were trying to sell after they had tried to sell it for over a year unsuccessfully. Late one night in Munich, Germany, he and the sellers hatched a plan for him to buy that business, and over a couple rounds of scotch, which is why we have the logo that we do. So the blue pays a little bit homage to the Bavarian flag that you find in Munich. then Speyside is a scotch whiskey producing area of Scotland. Jason Kirby (11:28.078) Eric Wiklendt (11:29.931) Based on being able to get that deal done with $300,000 from his 401k and then the rest debt, so like a 99 % debt to equity ratio back pre global financial crisis, he was able to start Space Side Equity and start investing in manufacturing businesses, the kind of things we still do today. So the history of the firm is one where we really like to find. deals and misaligned ownership structures and structure them and then transform them in our ownership period and create value that way. Jason Kirby (12:06.126) That's something I want to talk about. You guys have this history and it's all the rage of how do you get these sellers' notes that can lead to these types of value creation. I think for the audience's information, can you help get the scale of the types of businesses that you guys have transacted and how it's evolved over time? Eric Wiklendt (12:26.581) Yeah, so now we really like to focus on 50 to $500 million revenue businesses with 2 million to 70 million of EBITDA. But when we first got started, some of those businesses, early going, might have been a little bit smaller. Nowadays, we have a bright line of we won't do anything below 50 million in revenue. You can make a lot of money doing those sorts of deals, but you also take on a decent amount of risk for the kind of deal that we like to do. And the kind of deal we like to do are often deals where we see an opportunity to execute what we call the fix and build strategy. So phase one is improving it so that it's a scalable platform, improving the EBITDA and EBITDA margins. And then phase two is a build or top line growth focus with bolt on acquisitions and organic activities to grow sales and revenue. But in the past, yeah, we would do smaller deals. And we had some that were phenomenal, ridiculous returns and Moiks, IRRs and Moiks. But you got to be careful doing those sorts of things because small things can kill small businesses, as we all know. Oftentimes, because they don't have the scale in terms of people. processes and systems to deal with challenges to the business. So a small thing can create an insolvency issue in a small business. So going forward, we still do what would be considered lower middle market or middle market manufacturing and value added distribution businesses, again, 50 million to 500 million in revenue, where there's some opportunity to improve them. But no longer do we do the sub $50 million micro cap deals where transformation is needed. Now we'll do bolt-on acquisitions below that and I would also argue that those deals if it's a situation where it's a good company and a transformation isn't needed, you know, we would look at that. If it's just it's already running really well and then we just need to do the second phase which is more the growth phase, that's okay. But if we're gonna do fix and build, we don't go below 50 million in revenue. Jason Kirby (14:43.544) So let's talk about how you guys got started with that because now you have this bar. You've earned the right, you've had success, now you can go for those bigger deals. You have the capital to do so. But for our audience to understand what it took to get there, what was that first deal where you really try to structure it in a way that created this upside? Give us some of the details of that. Eric Wiklendt (15:00.203) Yeah. Eric Wiklendt (15:08.351) Yeah, the short answer is scrappiness and bootstrapping. there's a lot and taking on like deals that, you know, probably other people didn't really want to touch because they were hard, right? There was a, you know, we could get by with like sweat equity and the sweat equity that we were putting into it was intellectual capital. It was like knowing how to get really difficult deals done and having the time to do it. And that is hard. You're taking on a certain amount of risk and you need to show basically how you can do that and then get it done and generate the returns. So it's kind of one of those things like, you know, think of it as a, kind of think of it as like maybe like baseball or hockey. There's kind of like the minor leagues, right? Like a double A, triple A, and then like the majors. And so you in private equity or entrepreneurism, you might play in those like lower leagues to start with earlier in your career. And then you kind of like level up based on, you know, showing the ability to do well in those situations. And honestly, I would tell you that I think it's actually harder to do well in those lower situations because you don't have the same amount of resources and you can a lot of times. calling capital, that part of the deal structure is a little bit difficult as well. So if you can kind of make it there, you can make it anywhere. the answer is you take on things that are a little bit more challenging where your time can be used as capital to get the deal done and get the returns. And then you kind of level up from there and then get into bigger, more institutional-oriented investing as you go. Jason Kirby (16:59.566) I think that is kind of the evolution that most people want to have that experience, especially if they don't have the means at beginning of the time. I guess when it comes to that first deal that you guys did and like the, our deal, like actually let's talk about, I think it's Opta, the bigger deals that you guys have done. Walk us through the journey of like how you identified that deal, what was kind of the deal architecture and then what has that ultimately become? Because I think me if I'm wrong, but you guys also launched a continuation fund dedicated specifically to that entity, which is not necessarily a common play. So I'd be curious to kind of hear how that worked, why you guys chose those decisions. Eric Wiklendt (17:32.204) You Eric Wiklendt (17:43.383) Yeah, Opta is like the perfect deal to kind of explain like what we love to do. And the reason why I say that is, you know, the, I'm going to give you the conclusion first, which is when we bought Opta way back in 2016, it had 7.8 million of EBITDA and now 10 years later, it has over a hundred million of EBITDA. And a lot of that was organic. going from, let's round 7.8 up to eight. So going from eight to 85, which is when we exited into the continuation vehicle, that was all what we would call phase one activities. It was all operational organic actions. So that was improving EBITDA by improving the operations of the business, improving the EBITDA margins. growing very organically through Salesforce effectiveness and launching new products and things like that. And then the next journey in a continuation vehicle over the last few years here has been more about acquisitions and investing in new manufacturing plants around the world. So that, you know, it's a tale of two phases, but what's great is like phase one, you know, we 10X the EBITDA. by basically, you know, just improving the business, uh, fairly substantially from 2016 to, uh, 2023. And there was a merger in there that helped, um, a bit as well. So we put Optin and SKW together, but when those two businesses went together, they had like mid twenties of EBITDA and then three years later, uh, had triple that. And, uh, that was all because we did that phase one approach, which was the operational improvement phase. And now in the continuation vehicle, we're doing the phase two part, which is the build part of it. So we've done, think it's seven acquisitions in the last three years. And then we've opened five new manufacturing plants in Turkey, India, Brazil, Alabama, and the Toronto area in Canada. you know, a of, a lot of organic growth along with acquisitive growth and the continuation vehicle was set up. Jason Kirby (19:42.382) you Eric Wiklendt (20:07.851) to fuel that growth with the right cap structure to supply dry powder into those investments to grow the business. Jason Kirby (20:19.564) What is it manufacturing? What does that company manufacture? Eric Wiklendt (20:22.635) Yeah, so it has three segments that they focus in. So they provide performance materials into metallurgical solutions, concrete and cement, and pulp and paper. And they don't make steel, they don't make concrete, they don't make cardboard, but they provide the additives and catalysts and reagents that make those things better. Jason Kirby (20:49.846) And were you manufacturing all of those things before you got involved? Or did you guys add those through acquisitions and organic growth? Eric Wiklendt (20:57.931) So the big thing that they did when we started with it was they did metallurgical solutions. that business, when we started with Opta, really had three business units. It was metallurgical solutions, primarily focused on steel. And then the second one was abrasives. And then the third one was a garnet business that was more of a trading business, mostly used in like wastewater treatment plants, water jet cutting, and a few other applications. And it was kind of interesting because there were a lot of other PE firms looking at that deal when we ended up getting it. Interestingly enough, there was another private equity financial sponsor that had the deal under LOI and exclusivity. But what ended up happening was they kind of angered the CEO of the parent company that selling it off. And as a result, he switched horses kind of mid race to space out equity, which worked out really well for us. But the reason why some other folks were, you know, looked at it and then kind of said, eh, not so sure about that was the business really needed to be transformed post deal. And what we did was we kept the metallurgical solutions division and we basically over time sold off or transformed the other two businesses. completely rid of the garnet business, sold that off. And then the abrasives business, we significantly curtailed, probably sold off or closed down about 90 % of it, all the stuff that was cashflow negative or EBITDA negative and consuming a lot of human capital, fixed capital and working capital. That worked out really well. I was based on the strategy I put together. We were able to double the EBITDA of that business in the first 18 months. pay down the debt, have the debt as well by selling off things and generating better working capital and free cash flow efficiency in the business. So kind of good story there what we did. But it needed transformation and that worked. Jason Kirby (23:13.425) I want to talk about that a little bit more because this is the kind of fun stuff that people love to kind of know what's going on behind the scenes. It's like here's this Paracel offloading for whatever reason, these assets that are focused on these different products that you mentioned. And as you go to decide, how did you kind of identify the diamond in the rough that the other PE firms couldn't really recognize? Eric Wiklendt (23:19.381) Sure. Jason Kirby (23:38.414) Like, did you have enough data to know that you would be able to sell off one of those and like shut off the other? Or were you kind of gambling like, you know, that you would be able to execute on these things? how, how true was your underwriting to the reality of what actually came out and what would you attribute that to? Eric Wiklendt (23:56.684) Yeah, so here's what I'll tell you. When we do every deal, we do an underwrite and we put together very detailed project plans and ownership plans, especially for the first two years of what we're going to do and the actions we're going to take and how it's going to affect the business. I think on average we get that like, I don't know, 70 to 85 % accurate and correct. This was a weird one where it was like 98 % accurate. Like literally the plan I put together by month. Actually in the first two months, it was like literally by week. And then for the first 18 months, it was like by month. It was like, okay, these are the plants we're going to, these are the businesses we're going to keep. are the and businesses we're not going to keep. It went on that plan or better, you know, almost perfectly, which is odd. Like it never goes perfect. Like you don't usually see it go that well. But what we'll do is we'll kind of put enough, you know, basically, you know, opportunity in the plan such that if things don't go perfect, it will still work out okay. And in this business, the reason why other people didn't want to do it, which makes sense. And it kind of makes sense why we were comfortable with it was there were 26 manufacturing plants in that business when we bought it. And within 18 months, we had that down to nine. And everybody saw that like things were going to need to be reorganized and transformed in the first 18 months. And most PE firms look at that and go, wow, like, you know, doing something with 17 manufacturing plants, that's a lot. that's That feels very cumbersome and burdensome. But because of our backgrounds, you know, having worked in manufacturing, we've all been all the partners at SpaceSide, all the C-level guys at manufacturing businesses, at middle market manufacturing businesses. We looked at that and said, okay, we understand what happens at these manufacturing plants. We understand how shutting them down will work. We understand how to execute that. Eric Wiklendt (26:12.395) we understand what resources will be needed. We're comfortable with that. Whereas a lot of other people would look at and go, know, assume liabilities, you know, that I need to deal with, assume, you know, human capital issues I need to deal with, assume fixed capital issues I need to deal with, ooh, big, messy, know, scary. And we looked at it and go, eh, it's not, it's, these plants aren't really. Jason Kirby (26:22.159) you Eric Wiklendt (26:38.857) that hard to deal with compared to other things we had dealt with in the past. So we got very comfortable with it. And it was very clear how that linked to a financial result. those, you know, businesses we sold off and plants we shut down, it was very, very clear that they were consuming 70 % of the capital of the business and providing very little, any, EBITDA. And in a lot of cases, negative EBITDA or negative free cash flow. So based on that, it was easy to say, let's, you know, it's like a little bit like being a surgeon, like let's cut out the bad part and, you know, be done with it. And therefore, once we do that, like the patient will flourish and that's exactly what happened. Jason Kirby (27:21.295) Yeah, and often, lot of experience that I have with companies is it takes this change management, like it takes, you know, change in ownership to be able to make those cuts just due to whatever legacy, relationships, culture, whatever might be there that says like, okay, this was someone's project that they, you know, we to them enough time or whatever. And reality is like, no, that's cancer. You just need to cut it out and, you know, focus on good old fashioned cash flow. Eric Wiklendt (27:32.704) Yep. Eric Wiklendt (27:45.567) Yeah. Eric Wiklendt (27:51.5) Yeah, it's like people, the owners are like, no, but it's my favorite tumor. It's like, but it's a cancerous tumor. You gotta get rid of it. It's like, but I've known that tumor for 20 years. And it's like, it's still a tumor. Jason Kirby (27:51.663) Jason Kirby (27:57.667) Yeah, still a few more. Jason Kirby (28:08.559) Yeah, no, mean, that's, that's why I think private equity plays such an important role in the economy and just being able to kind of bring in that fresh ownership perspective. I see deals all the time, especially with founder like companies where I'm like, you got to kill your baby. Like, you can keep the other two babies, but you to kill one of them. And that's just a really hard pill for them to swallow. And you kind of have to, you know, get a deal done and post-deal, post-founder, you kind of have to go in there and make those cuts. Otherwise, you know, it's just. that founder will never do it themselves. So, Kyrgios, when you come into transactions, so we talked about Opta and kind of deal structure, and like, I guess what's some of the pitfalls that you've run into that you kind of now reflect and like, okay, you know, this is 98 % of the plan. Like, what would you do differently? Eric Wiklendt (28:58.389) Yeah, I think the biggest challenge with private equity, private equity generally, and then also, maybe I'll talk a little bit more about our strategy. But private equity generally, I think that it's very easy to overvalue businesses by using hope as a strategy, right? What I mean by that is like, you'll see folks, you know, they'll look at a deal and they'll value it and put a, you know, multiple on it and ultimately an enterprise value because they hope that the economy is going to get better. And the top line is going to grow organically with macroeconomic tailwinds. They'll put a higher valuation because they hope that they're going to do acquisitions that will have synergies and create value in the business, right? They'll put in a higher valuation on things because they hope they'll exit at a higher multiple than what they bought it at, kind of a greater fool strategy. So that's a challenge in private equity and or they'll put a higher valuation on it because they hope that they can get a five to seven X leverage ratio and write a really, really small equity check with a massive amount of debt. And that that debt will not create insolvency based on, you know, everything going really well on their whole period. So we don't do those things at SpaceSide. We kind of assume all those things are going to, you know, either be negative or not happen. Like we, we never assume multiple expansion on exit. We don't assume macroeconomic tailwinds. Usually we actually assume like negative macroeconomic growth. don't put. Even though we'll see things and we'll be like, we can definitely do some acquisitions here. We don't build those into the model and we don't use a lot of leverage. We tend to use two to three X leverage ratios or less to start with. Just because we know that what we like to do with our strategy, again, fix and build, if we need to do a transformation to start with. Eric Wiklendt (31:17.023) That is very hampered by a lot of debt service. So we tend to use very low debt to begin with until we've improved to the business to get it to a nice stable growable platform. And then we'll come back and recap the debt. But we still probably won't ever go above like three and a half or four X leverage ratios just because we tend to be more conservative and it's manufacturing and in 50 million to $500 million revenue businesses, it doesn't. makes sense to have a five to seven X leverage ratio in our opinions anyway. There's plenty of growth opportunities and value creation without high leverage ratios. So that's a big thing that you see in private equity and it's just stuff that we don't do. I like to call it, back when I was a kid, I wrestled and I'd go to lot of like wrestling tournaments and wrestling is like 24 minutes of terror. combined with like six hours of waiting around to wrestle those four matches. So you play a lot of Euker, or, know, some card game with your wrestling teammates in between. And we'd always like try to stack the deck against each other. And that's a lot of like private equity investing in space side in our strategy is like, how do you try to play, you know, the game with a stack deck so that, you know, you get the outcome that you want and that stack deck. is not over levering it and it's getting the right entry multiples and understanding what the right transformational activities will be in the first couple of years to set the business up for success. Jason Kirby (32:52.891) So, you know, I love this, you know, don't have hope as a strategy. But when it comes to like what you're seeing in the market, what are you seeing right now, 2026, in terms of access to leverage, both from the deals that you're doing and maybe, you know, other people that you're seeing? Eric Wiklendt (33:11.596) Yeah, so for us, know, so there's a lot going on in the debt markets right now, especially private credit. There's some challenges there. It hasn't affected us, you know, negatively relative to being able to access capital, because again, our debt structures tend to be pretty conservative at a two to three X leverage ratio. And there's a couple different private capital guys we work with that, you know, we've been able to you know, do well with and have good build good relationships with. But for other people that really like higher leverage ratio deals, I'd say it's a little bit more difficult right now. know, debt costs have gone up over the last like, 45 years, which means that multiples have gone down, which, in my opinion, that's actually kind of a good thing, right? Because it's like a more efficient allocation of capital. because we're more realistic about what capital costs are. Like, you know, four or five years ago when debt costs were dang near zero, like it was really easy for people to pay really high multiples because like the debt was almost free. And if you did it on a nominal basis, you could almost argue it was free because inflation was higher than, you know, some of the rates you were getting on some of the debt instruments. But you know, whatever, that's a whole nother macroeconomic treatise. I don't need to go down. But the, the upshot is for us, it's fine for a lot of other private equity firms. It's difficult and it's a bit of a double whammy for other PE firms. And here's why. So, you're still seeing a hangover, hangover effect of COVID right now. And what I mean by that is people are holding, they've been holding businesses for longer than they wanted to. Jason Kirby (34:41.93) Thank Eric Wiklendt (35:05.9) because COVID put a three to five year stay on exits for people. So they're three to five years behind on the exits. So they haven't generated the returns that they were looking to generate when they were looking for generating returns. So it's kind of like they're off schedule, they're off cycle in terms of how things go for private equity. It's like you raise, you deploy, you exit. You you do it all over again. It's like overlapping sine waves. It kind of looks like, you know, electricity, three-phase electricity of three sine waves. But now those sine waves are elongated or broken up because of COVID. And then the other issue is like, right now, people are kind of, because of a lot of things that are going on geopolitically or macroeconomically, there's a lot of people going, I'm going to just hold this business right now. Jason Kirby (35:48.496) you Eric Wiklendt (36:04.297) you know, and wait and see what happens and or the things that are coming to market. You know, typical private equity is looking at it going, man, debt costs are really expensive right now. So, you know, the multiples we would normally pay when debt costs are cheap, those have become a lot lower and then not as attractive to sellers and therefore like their deal flows a little bit curtailed. So the good news is for us because of what we like to do. where we're fine with, know, hairier deals that need to be structured and we're fine with deals that need to be transferred after we own them. And given that we don't use a lot of debt, we're seeing really pretty good deal flow of things that we're excited about buying and structuring right and, you know, giving sellers a solution if they're looking to get out at this point. Jason Kirby (36:52.976) And so when it comes to the manufacturing space that you're in, what do you typically see multiples at? Like how are these companies being valued at? Where are you going to see the price ranges from? Eric Wiklendt (37:04.907) Yeah, low to mid, single digits tends to be what we're seeing. And it depends on what phase that business is in. So if we need to do fix and build, it's toward the lower end of that range. If it's a situation where it's a business where we're just going to improve it by growing it, more just phase two, the build part, then more towards the higher end of those ranges. Obviously it depends on the segment they're in and you know what they do and you know their competitive dynamics in the segment and whatnot but yeah the short answer is you know low to mid single digit entry multiples for manufacturing businesses. Jason Kirby (37:51.845) And you can clear that on EBITDA. Yeah. And in the manufacturing world, I'm curious, how much of a difference do you see between EBITDA and cash flow? Is there more cash flow than EBITDA or is there less cash flow than EBITDA? And how do you guys value cash flow in these equations? Eric Wiklendt (37:54.111) I'll leave it at yes. Eric Wiklendt (38:03.466) Mm. Eric Wiklendt (38:10.292) Yeah, great question. And one that's very, very important to consider. I, you know, the thing is, that's interesting is EBITDA is a heuristic or, you know, rule of thumb, kind of for unlevered free cashflow. It, it doesn't exactly work one to one, obviously, but that's kind of the theory. So like a lot of people use that as a multiple, use that as a way to do a multiple, right? And I would say most of the time, that's pretty accurate. It's very directionally correct and that works. That said, you do have to understand free cash flow and unlevered free cash flow and free cash flow conversion. The reason being is that part of what goes into calculating free cash flow, as I'm sure you know and everybody else knows, you got to think about cap-ax capital expenditures. So you can have a business that has a ton of operating cashflow, right? Cashflow that's derived from that income and working capital, but it might have not a lot of free cashflow, which is essentially, I'm gonna overly simplify this, but operating cashflow minus capex basically gets you to free cashflow. Like how much money do you have to spend on basically debt service? And then you take out debt service and then it's like, Okay, how much cash flow is available to equity holders? Well, if you have a lot of capex in the business, then you don't have as much free cash flow that's available for debt service. And that's a really, really important distinction in manufacturing because in manufacturing, different manufacturing businesses or segments have more or less capex. you know, it's, we tend to like businesses with, and this is, everybody, this is true of everybody, but like, we really look for it, we screen for it, which is, we like businesses with higher free cashflow conversion, we're completely happy to invest in CapEx, know, fixed capital, property plan, equipment, especially when it has the ability to dramatically improve the profile of the business in terms of either improving the EBITDA or EBITDA margins or improving the cashflow. Eric Wiklendt (40:37.74) of the business in some way or form. But it's something to think about in manufacturing businesses, whereas like service businesses tend to have a lot less capex and therefore they have, they generally speaking as a segment, service has a better free cashflow conversion than most than the average in manufacturing. So it's something that we think a lot about and it's really, really important to think about it. But You know, if you, as long as you're paying an appropriate multiple relative to an EBITDA multiple relative to free cashflow conversion, it's okay. But like we looked at a business about 18 months ago. It was kind of interesting. had like 30, if I remember correctly, had like $33 million of EBITDA per year, and it had $30 million of CapEx. So, you know, when you, when you take the, you know, the EBITDA and then you. Think about how that business would grow and how that would affect working capital and then you subtract out the capbacks. The answer was that free cash flow was actually negative, not positive. Jason Kirby (41:46.289) Yeah, and that's why I wanted to ask that question because I think it's something that's just so often overlooked. I feel like all the details of a business, whether it's healthy or not healthy, is found in the cash flow statements in terms of like, catching cash out versus P &L or balance sheet. I feel like cash, actually, you see how much cash comes into a business and how much actually goes out of business actually tells you a lot more of what's actually happening. Eric Wiklendt (42:01.697) Yes. Jason Kirby (42:15.984) And so I think that's why it's so important for people to understand, one, what multiple you're actually paying on versus what's going on with the business. Eric Wiklendt (42:25.1) Just another interesting story anecdote about that. Another business we looked at last year had allegedly $5 million of adjusted LTM EBITDA, like last 12-month EBITDA. But when you looked at the free cash flow, it was only $1 And the reason why is the banker had done a ton of adjustments, and there was a change of accounting principle. And so when you looked at it on a, you know, basically they had adjusted their way to 5 million of EBITDA, but the free cash flow was 1 million. And it was all in the adjustments that were, they weren't pro forma, they were pro FECA. And so you look at it, you go like, okay guys, come on. Like I can't spend EBITDA, I can only spend cash. And the... Jason Kirby (43:08.912) Probe together. You're cool with that. Eric Wiklendt (43:20.66) I think it's a really important thing to understand. We use shorthand multiples of EBITDA on private equity to get a good directionally correct understanding of a value. But then when we're doing the LBO model, the three statement LBO model, we're spending a lot of time understanding unlevered free cash flow. And to your exact question, how closely does it really mirror EBITDA? Because you can fake EBITDA. There's a lot of ways to fake EBITDA. There are not a lot of ways to fake cash flow. Like there's basically none. Jason Kirby (43:56.015) Yeah, well, can just commit five flat out. Eric Wiklendt (43:59.85) Yeah, there are no honest ways to fake it. Let's put it that way. Jason Kirby (44:05.936) Yeah, there's no way to sleep at night and do it right. So when it comes to kind of private equity as an asset class in the current market that in right now, like actually, that's gonna be a leading question. I can't ask that one. Let's cut that. That'll get you in trouble and me too. So, given all the deals that you've now worked on, And you guys have done this unique structure where it's kind of like more family office. You've done a lot with your own capital from the success of your previous acquisitions, but you have since raised this continuation fund. You raised a couple of funds. What ultimately led to you to going out and seeking outside capital as opposed to continuously funding everything internally? Eric Wiklendt (44:52.374) Yep. Yeah, simple answer, speed. Speed of getting a deal put together and calling capital. And here's why I say that. So before we raised the fund, there were kind of like three parts of a deal that we would work on. So one was basically the structuring, like how we're going to structure it in terms of like dealing with the seller's needs. Number two was like, okay, how are we going to transform it after we close? And then number three, you know, in some of the bigger deals we looked at was what's the cap structure going to look like? you know, figuring out the debt is not that bad to do. mean, you got to do it. You got to model it out and understand it and whatnot. But the hard part was when we needed, we didn't have enough money in our pockets to figure out the equity cap structure. quickly and we had to go out and raise outside capital more like an independent sponsor would do. And there were certain deals that we were looking at that we loved. We're like, this is a great deal. It fits us perfectly. There's a structuring opportunity here and there's a transformation opportunity here. We've got the debt all set up. We know how to do that. We just need like a bigger equity check because either, you know, it's too much of our own net worth or It's helpful in the structuring to have a partner. And we lost out on, I don't know, probably like 10 or 15 really good deals between 2012 and 2016 because of speed. So we kind of said, okay, how do we solve this? And what are other people doing to solve this? We really like putting our money where our mouth is. Jason Kirby (46:24.529) you Eric Wiklendt (46:45.184) but we need to get better at being able to close these deals quicker or else we lose them and we miss the opportunity. Well, the answer was, well, let's raise the fund and have institutional capital that will allow us to call capital and be able to get these deals done. And so that's what we said, hey, let's go out, let's raise the fund and get that done so that we can call capital. And then we take that. third part off the board of being a challenge of like, how do you set up the cap structure quickly to take advantage of the structuring and the transformational opportunities that we were seeing. So yeah, that was the answer was, know, speed to close sometimes matters to be able to get a really good deal done. so having a fund that we could call capital from allowed us to deal with that constraint and it's worked out really well. Jason Kirby (47:40.658) That's good context and good for everyone to know. Eric, what I want you to do now is I'm going to ask you some question and I would love for you to give me your best answer in less than a minute for these next few questions here. First I want to hit is, what is the first thing you look for in what we've called here a messy manufacturing business that tells you it can be a great opportunity? Eric Wiklendt (48:06.304) Yeah, so for us, it's pretty simple. It's some opportunity to enter at a reasonable valuation because they're structuring and transformational activities. So we're very willing to work with sellers that have businesses that are underloved and under managed and therefore underperforming to buy them in a structure that is useful to the seller and innovative or whatnot to get the deal done. And then after transform the business in a way that improves it such that it's worth more. you know, said simply sometimes one man's trash is another man's treasure. And we're sometimes economic garbage man in that way where we'll buy something that's maybe under loved and under managed and, you know, therefore maybe not one man's treasure and we'll take it and, you know, improve it and make it into, you know, something. Jason Kirby (48:50.213) Thank Eric Wiklendt (49:05.043) nice and better performing. Jason Kirby (49:07.739) So now tell me about a deal that you walked away from specifically due to a red flag that you encountered in that deal process. Eric Wiklendt (49:15.596) Yeah, sure. We had a deal last year, you know, where we were working on the deal and we walked away because the red flag was the management team in the deal. And we got as we started to do some due diligence, we looked at it and we said, you know, the people in this deal and this company were we're not so sure about. And there's two things where we, you know, kind of. we kind of say like, you know, maybe not right. And one is integrity, right? So if we look at something, go, we questioned the integrity of these folks, like that's a huge red flag. And then at our firm, you know, we have a kind of a no, excuse the foul language, a no asshole rule. we, we don't, we don't like to work with people, that, you know, they love them, some of them, too much. And it just doesn't. doesn't fit for us. So if integrity or, you know, big egos where the ability doesn't back up the ego, we're not good with that. So that deal was one of those cases where both existed. And we just said, you know what, this isn't the right fit for us. you know, it's management teams are really, really critical in deals. So we're gonna, we're gonna just walk away. Jason Kirby (50:39.121) So for a founder, for a founder deciding to whether take a deal from private equity or a strategic buyer, what's the difference they can only realize after the deal is closed? Eric Wiklendt (50:48.717) Hmm. Eric Wiklendt (50:54.785) Yeah, so good question. Probably a really good question for me because I've worked in both corporate &A and private equity. So how strategics think about acquisition is a lot different than how private equity thinks about acquisition. The biggest difference is the assumption of hold period. So in corporate &A, the assumption is perpetuity. And so it's, you know, That's an important difference. And in private equity, it's usually five to seven years. What's interesting about that is, you know, in corporate &A, a lot of times you're looking for synergies. And that means, you know, a lot of times those synergies are found in redundant management. In private equity, don't want to find, we're not looking for redundancies in management. We want the management team to stay with the business because that's ultimately who's going to run it. We make our money by doing deals, not by buying them and running them for the management team. So those are the two big differences to understand between the two. if a strategic buyer buys a company, they want to fold that into the larger enterprise. They want to assimilate it and then turn the crank on the cash flow. Whereas in private equity, they want the business to run independently. improve it in the five to seven year hold period, but it's not an assimilation where a lot of things are going to change. In private equity, we want as many things to stay the same as possible because there's enough other things going on in the deal that it doesn't make sense to want to try to change as many things as possible to generate synergies. We generate our improvements by doing incremental improvements, evolutionary improvements, not revolutionary improvements. Jason Kirby (52:53.458) And final question, what's your advice for a founder trying to sell a complicated business to maximize upside? Eric Wiklendt (53:01.116) Yeah, a couple things there. First of all, start early. And number two, guess, would be hire good advisors starting early. There's a lot of folks out there that will consult with you on how to exit, whether it's an investment bank or consulting firm, on how exits work. And usually you kind of want to start 18 to 24 months before you want a deal to close. start thinking about what that looks like. And then the third thing would be, if you haven't done it already, thinking about that in the 18 to 24 months prior to exit, you got to set up the business so it's a scalable platform. And what does that mostly mean for the seller? It means that the business can run without them, their all day, every day, micromanaging thing. buyer needs to see that the business comes with a strong management team that can continue on after the seller sells the business, assuming the seller may or may not want to walk away. But the assumption is going to probably be from the buyer that once the seller has a lot of money in their pocket, they're probably not going to want to continue. And they may not even say they do. But a lot of times sellers say that. And the reality is like three to six months after. They're kind like, you know, I kind of want to go pursue other things because I had a nice exit here. So those are the three big things. Plan early, hire the right folks to help you, and then make sure the business is set up as a scalable platform. Jason Kirby (54:43.727) Well, great advice, Eric. Eric, it's been amazing having you on the show, getting your insights. If anyone wants to reach out or learn more about you, what would be the best way for them to do so? Eric Wiklendt (54:54.016) Yeah, two good ways to do that, Jason. If you go on our website, space.equity.com, you can find my contact information there. And or if you go on my LinkedIn, it's just my name, my contact information, cell and email are also there. And yeah, I was happy to talk to people. If somebody's, you know, wants more thought on selling a 50 to $500 million revenue manufacturing business, structuring or transformation works in that, happy to talk to them and then. We're always looking for good folks to work with in our portfolio companies as well. So if there's folks out there that are, know, want to work in a $50 to $500 million revenue manufacturing business, we're always looking for operating partner talent and C-level talent. Jason Kirby (55:40.301) Awesome. Well, Eric, thank you so much for coming on. We'll make sure to include those in the show notes down below. And if anyone would like an intro to Eric, don't hesitate to reach out to me directly, jason at thunder.vc, and I'll be happy to put that intro up for you. Eric, thank you for coming on. Eric Wiklendt (55:57.452) Thanks for having me.