What does it take to successfully purchase businesses & grow them for the long term?

Malcolm Peace is the founder of Tsetserra Growth Partners, a firm that specializes in buying family-owned small businesses with established Texas legacies.

In this episode, he’ll share his M&A wisdom.

He’ll cover:

• His firm’s buy-and-hold strategy
• Working with B2B businesses in blue-collar industries
• Reps & warranties
• M&A predictions for this year
• And more

Mentioned in this episode:

• https://tsetserra.com/
• https://www.facebook.com/photo/?fbid=10157228155650271&set=a.10152562644625271
• https://www.linkedin.com/in/malcolmpeace/

Transcript

Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and founder of Rubicon M&A Insurance Services, now a proud member of the Liberty Company Insurance Broker Network. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors.

Today I’m joined by Malcolm Peace, founder of Tsetserra Growth Partners. Tsetserra Growth Partners specializes in buying family owned small businesses with established Texas legacies. Unlike other acquirers who buy businesses with a short term relationship in mind, Tsetserra positions itself to purchase businesses to operate and grow for them for the long term. So it’s a definite buy and hold strategy there for you, Malcolm. Welcome to the program. Thanks for joining me today.

Malcolm Peace: Oh, I appreciate that. I liked the note about a clean exit for owners. I think that we embody that. We would say it slightly differently. We want to work, you know, collaboratively with everybody involved and make sure it’s the best possible outcome for everybody. But I like that. That’s succinct, and to the point. A clean exit. I like that for everybody.

Patrick: Well, I appreciate that. I think that’s the goal as you go through this, it tends to get a little bit messy. And then you’ve got, you know, the human emotions of fear and greed, that cloud a lot of these things. And at the end of the day, we just want to make sure that we get it done and nice and clean, and both sides are happy. And as we talk about this, you know, first of all, Malcolm, before we get into Tsetserra Growth Partners, let’s set the table. Why don’t you talk about yourself real quick. How did you get to this point in your career?

Malcolm: Yeah, that’s a great question. Appreciate you asking. Candidly, I started doing, you know, just most recently, prior to launching in 2020, we were doing deals in hospitality and food and beverage. I had two partners. We were, I was learning a lot from them. I was a young guy on the team. And we were doing deals in that space.

And one of the things that we needed to do, just by way of the thesis that they were working on, is we were buying these old bed and breakfasts and adding existing facilities onto them within the Texas Hill Country. And so we had this idea that we could take things that had some proven success, some market value to them, and add significant real estate to them, but also improve their process and outreach, and so on and so forth.

So call it a little more entrepreneurial, but taking some you know, bones that were already there and adding some extra muscle to them. So what ended up happening by way of these opportunities is they needed somebody to fill the development side. And I had no background in real estate development, but had a background and just figuring things out operationally as best we could and stacking processes and so on and so forth.

And so I learned a lot. I learned a lot very fast. Thankfully, one of my business partners had a real estate background, he had done multifamily deals in the past and had significant experience there. And so he was kind of guiding me while he was, you know, earmarking, a lot of the financial and that was a lot of his background too. And so we collaboratively got it done. But what ended up happening is I interacted with a lot of folks that were just blue collar, good boys from Texas over and over and over again.

It was the guy that was doing the site work. It was the guy that was doing the dredging for our installations. It was the guy that was going to build our pool, it was the guy that did our porta potties, I mean, you name it, I was interacting with it. And what I came to realize, I juxtaposed that experience to the experience that I had before, where I was working at a private equity fund that was getting launching off the ground that was in cybersecurity and defense.

And I’ll never forget that I went to a conference in Las Vegas. And it was kind of the early days of web three and cryptocurrency was kind of on the rise and all these types of things. And I was sitting in a room with very intellectually capable people. And I was a total fish out of water. Like I had no IT background, my parents had been in data management and data IT most of their careers.

And so I you know, understood, but I promise you I barely made it through a coding class in high school. Like this was not my expertise. And so I was sitting in this room thinking man, I’m gonna have to be the one to evaluate to buy these companies. And we were looking at businesses that were in cybersecurity and defense contracted to the government companies.

And when I juxtaposed my experience with these guys doing these real estate and hospitality business deals, and the cybersecurity experience I had, I was like, finally. Like I finally feel like I relate to somebody where I can be out on a tractor cutting down trees and enjoying the clearing process, but also at the same while talk like true business principles. And so I remember distinctly having a conversation with a porta potty and dumpster removal.

We were planning out how we were going to, you know, build out this facility and I was planning out, you know, the turning radius and all this kind of stuff for the dumpster that they were going to manage for us. And I just said to him, I was like, what are you doing about your business? And he is 60, 50-60 year old guy. And he said, it’s so funny that you bring that up, because my business partner’s son is probably about the same age as you and we’re going to help transition to him.

But if I didn’t have my business partner’s son to transition the business to, I’d probably want to sell to somebody like you. And that was like an aha moment. Like, wow, okay, at 30, 32 years old, I can come in and go run a business, for honestly, people that want to sell to people like me. And that was a real eye opener. So those kinds of events kind of started stacking on themselves, where I started realizing here’s an opportunity come 2020.

For me, having experience raising capital, having experience structuring deals and putting them together, having experience interacting with these types of folks, where I thought, hey, hold on a second, maybe there’s a chance for me to go out and do this. And so we started putting the pieces together.

Patrick: Well, let’s transition Tsetserra because what you’re doing is you bridge that gap where a lot of organizations are. They’re run by owners and founders, and they’re not going to be you know, they’re not gonna live forever. And so they have to think about that next stage. And there are organizations like you that come along now, where there’s a connection. I think that’s really important. And we’ll get into that, because that’s the human element of mergers and acquisitions that I think gets overlooked. But start with Tsetserra Partners. First of all, how’d you come up with the name?

Malcolm: Yeah, so Tsetserra has been talked about, candidly, my whole life. So Tsetserra was a farm that my great grandfather owned. It was 70,000 acres, it was on the border of Mozambique and Zimbabwe. It’s you can look it up, Mount Tsetserra, it was just at the base of that. And it is candidly like the pinnacle of what my family talks about. It’s always been talked about, it’s always been talked about as like this safe haven in the area.

And if you can take the time to look up the history of Mozambique, Zimbabwe and Rhodesia at the time, you can recognize that there was a lot of conflict and issues in that area. And so essentially, my family had to abandon Tsetserra, but prior to that, it was an operating dairy and cattle farm that employed multiple families in the area and provided a resource to the community. And that’s really the essence of it.

My great uncle, or sorry, great grandfather, was entrepreneurial in nature. Had made money in different ways and kind of had come to this as like his pinnacle of his career, and but at the same time was grounded enough to say, you know, hey, how can we be a spotlight in the community? How can we be a spotlight to these people that we employ to really do it right.

And so that’s always been the essence of what we’ve done. And that’s always been the conversation points with my grandparents, and so on and so forth, about, you know, how they did it, right, and how they really took care of people. And that’s what we like to do. And I think you can’t, you can’t deny that in our industry. There’s folks that, you know, have to do what they do in order to get the returns that are necessary for the deals.

But I think we can structure it a little bit differently. And so we’ve taken a little bit of a different approach on buying and holding, and really trying to establish a reputation of taking care of the people.

Patrick: Yeah, now, keep in mind, you know, for my audience members out there, the number of private equity firms in the last five years has literally exploded. And more than half of these 6000 plus private equity firms out there, not counting independent sponsors, not counting family offices.

There are a lot of prospective buyers out there. And so, you know, Tsetserra Partners comes in, and you’re focusing, which was very interesting is that you’re looking at Texas legacy businesses. So you’re looking for family owned Texas legacy. Tell us what Tsetserra Growth Partners brings to the table for these companies in the lower middle market?

Malcolm: That’s a fair question. So I’ll tell you this, you know, we are up against tons of competition. There’s plenty of people that can be great quality buyers, we’re not going to be a fit for everybody. I recognize that. I can tell you that we have what I would consider a pretty strong playbook of how we would come in and add significant value to the lower middle market.

Recognizing that in some cases, we’re looking at businesses that are a little bit lower than maybe some private equity firms can do. So we’ll look at anything from 500 up to $1.2 million in EBITDA. Somewhere in there where it makes sense. I’ll say this too, is we have an approach where we will roll up our sleeves and get involved and some groups, you know, they go about that in different ways.

So that owner is going to be guaranteed that one they’re not on the hook necessarily to stay. So that’s one of the challenges that some private equity firms do is they roll equity. And that’s no disrespect to them. I recognize why they do that. It’s the strategy that makes sense. But we will look for potentially a full exit in most cases. And so with that in mind, the owner gets an opportunity to transition.

Often they get to transition well, you know, we try to structure in a way that makes sense to them from a tax perspective. So we try to holistically think about the whole process for them. In the experience that they’re trying to have given in mind, most of these small business owners have been earning, you know, half a million to a million and a half dollars for most of their time running these businesses for the last 20, 30 years.

And they’ve done well. And so at the end of the day, that dollar that they get paid is not necessarily always the biggest thing. It’s the structure, it’s how their people are going to be taken care of, and ultimately, kind of what the legacy is going to look like long term. And I can assure you that our intention is to take care of these people, and to continue the legacy because candidly, maybe this is a simple way to think about it, what else am I buying them?

If I’m not buying the legacy that this business has established in the local community or abroad, you know, that to me is the value that I’m buying. Again, different background, different approach, but that’s our thought is that I want to be able to say, hey, I bought this reputation, we invested in this reputation, and we intend on continuing to maintain it.

Patrick: I think what’s really appealing for a lot of sellers out there is they’ve built up something and they don’t want it to disappear. Now it gets to a certain point where they can, they’re looking for some kind of inflection point to transition out in your case, or they’re looking to transition out. Others are looking to scale and they need a partner.

But the value add that you’re bringing is to these people who are again, you’re looking at the salt of the earth, folks that are that are you know, in that region is they want to have a legacy, they want to see it move on.

And I think that you guys are the types of folks that that’s a real appealing pitch. Because it pulls at the emotions of people. And you’ve got to remember, mergers and acquisitions are not company A and company B and that’s it. It’s people. And so I think that that sensitivity you have on bringing that through, comes out very, very well.

Malcolm: Yeah, I would be amiss if I didn’t share this. There has been instances where I’ve been in the room talking to an owner and they’ve started to tear up because they’ve always wanted a son, daughter or niece or nephew to sell a business to. They have. And I’m sitting there and saying, man, I love your brick manufacturing company. I love your meat processing company. I love your bridge installation company, I love your surveying company.

Like this is awesome, what you’ve done here, and I always, I sincerely mean this. What I always try to convey is like you getting it from zero to a million dollars is way harder than the work that I’ll ever do. And I mean that because you’ve had to take the sacrifice, potentially, you know, in the long run, have delayed gratification for a long time.

You know, you’ve really done the hard work, and my goal is to, you can walk in in five years time, you know that you’re never gonna get bashed by name, your reputation is ever going to be hurt. And we would welcome you to walk in and celebrate you to see you know, what we’ve been able to do.

And when you convey that, and in a sincere way, it would be amiss, if I didn’t share that. Like, I have really had people cry and tear up in person to say, gosh, man, I thank you for just being a real honest, you know, human being to human being interaction. And so, you know, that’s our approach. And that and that means that, you know, maybe we don’t do 2, 4, 5, 6 deals in a year.

It may be that our sales cycle is a lot slower. And we’re not the right buyer for every single person, and I’m okay with that. I’m okay with that from a lifestyle perspective, and kind of the team that we’re building and all that kind of stuff. We want to do it right. And that be the reputation that carries us for decades to come.

Patrick: And I’m talking with somebody who’s based in Texas, and you know, there’s a lot of provincial pride in the state of Texas, whereas California, we’ve got a lot of people coming in from all over the world. Texas, with the exception of the Californians that end up moving there, but I think having that as another value add that you bring is you’ve got that provincial pride in that respect, and that’s a great way to be out there.

That’s why I also wanted to speak with you because, you know, owners and founders, they get to a point where you know, they want to transition out and if they don’t know about an organization like Tsetserra Partners, then what they’re gonna do is they could either default and find some larger institution or a strategic you know, acquirer out there that doesn’t have their best interests in mind.

And I think that this is you know why we want to go ahead and have you know, conversations with you. Get the you guys highlighted on that. Now, if you could for our audience, why don’t you, we’ve talked about Texas as the base but give us a profile of your ideal target. What are you looking for? Who do you look to serve?

Malcolm: Yeah, great. I appreciate that. So we buy businesses that have been established in Texas longer than 10 years. There are b2b businesses with blue collar industrial industries. To highlight kind of some key components to that, they have been, you know, been in business for 10 years, but they’ve been able to maintain revenues from three to $12 million over the course of that period of time.

I would rather have a business that’s been doing, you know, 5% growth year, 5% growth the next year, then this hockey stick to the right. It makes it more challenging to value that deal. It makes it more challenging to make sure everybody’s on the same page to close. And it candidly, it really risks the business long term. So a business that’s been able to maintain nice steady revenue from three to $12 million in revenue.

And, also, at the same time been able to do about a net margin of 15% is key for us. A nice established team that’s been able to work autonomously is great. I have a whole thesis that would be a tangential conversation for us to discuss. But we believe that the businesses where the owner has been in the middle, there’s an opportunity for us to have some arbitrage there. And so we look at that as kind of a key component.

Kind of what’s the key structure in place, we’ll take that with, you know, the structure that we put with the deal. But you know, all that to be said, businesses that have been in Texas for longer than 10 years b2b, blue collar industrial industries, and have done revenues from three to $12 million is a good starting point for us.

Patrick: But and I had mentioned earlier about the proliferation of private equity firms, and in mergers and acquisitions, and a lot of this comes down to the M&A transactions are a lot safer than they were eight, nine years ago, because there have been ways to transfer risk out. The insurance industry has come in with a number of products to ensure these transactions so that the parties aren’t pointing fingers.

You know, there’s a third party out there that can provide remedy for one side and relief and peace of mind on the other side. But, you know, the products out there traditionally, are reps and warranties insurance, which has been a huge, huge plus for mergers and acquisitions. But don’t take my word for it. Malcolm good, bad or indifferent, what’s been your experience with rep warranty insurance?

Malcolm: So we haven’t used it in the past, candidly. I had a M&A professor when I was going to the University of Virginia. And he told me you take the price, and I’ll take the terms kind of conversation. And so that’s always been my mentality, is I spent a lot of time on what the terms are. With that in mind, reps and warranties obviously play a big component of that and how we protect ourselves downside protection, and all that kind of stuff.

So candidly, you know, it’s a little bit new to me, as the opportunity continues to grow. I’ve seen it always as kind of a middle market thing. But as I’ve seen, just having conversations with you and other folks in the industry, that you’ve recently come down market with a products that can really serve us.

So as we start looking to add on more deals, and we look to get more creative in our structure, potentially, in order to close deals and close deals faster, which can be another value add for us. We have very limited, you know, kind of criteria as far as you know, getting through the door. At the end of the day, we want to work with that owner to come up with a collaborative thing.

This gives us a backdoor of like, okay, you know, if this thing goes sour or something comes up or something doesn’t turn out to be kind of as presented, this gives us opportunities to protect our downside. So I like it. I’m learning more about it. And I’m sure as we kind of explore going into the summer and future opportunities that we’re eyeing right now, it’s something certainly that I’m going to explore.

Patrick: Yeah, what’s been, I’m very thrilled about with the insurance market is how it’s been able to answer the needs of the marketplace. Reps and warranties insurance, as you said, it’s an ideal tool for the middle market. When you’re looking at transactions of $50 million purchase price and up, it is you know, a wonderful, wonderful tool. Very elegant.

But what do you do for these smaller deals that are down there and a lot of them are gonna be just add ons and bolt ons. And these are, you know, transactions in the 1 million to $30 million purchase price range, okay? Even if the seller wants that coverage, is willing to cover the cost, a lot of times the buyers just don’t have the resources at the time.

And they also don’t want to expend you know, a lot of effort in the diligence process because it’s a high diligence threshold for reps and warranties insurance. What’s nice is there’s been a new product out there called TLPE, transaction liability private enterprise. It’s a sell side policy, so the seller is the policyholder rather than the buyer.

The policy is triggered when the buyer suffers a breach and they suffer financially. They simply notify the seller of the breach. Seller and forwards that notice to underwriters. Underwriters will then respond and negotiate with the buyer to investigate the breach and then settle the claim.

So it fits the need real well. What’s great is, it’s a product designed for simpler, smaller transactions. There’s no high threshold for diligence that’s required. The process only takes a matter of a day or two. And quite frankly, at 15,000 to $20,000 per million dollars in limits. The policy isn’t based on the size of the deal, it’s just on how much, how many limits you buy.

And when you’re at 15 to 20,000 per million in limits, it becomes very, very affordable. There’s no underwriting fee, there’s no big, you know, as I mentioned, diligence requirements out there. And it’s been a nice, elegant solution for these organizations, these transactions that really need a home. Because I can tell you the peace of mind that the seller gets when they’re no longer worrying about having to indemnify the buyer makes it easier.

And also, it lightens up for the buyer too. I can imagine that once you’ve made an acquisition, that owner/founder is with you for a year or two, it gets uncomfortable if all of a sudden, you know, something comes up that nobody knew about. And so this is a way that, you know, we’re responding to a need in the market.

Malcolm: We’ve always, just a point to that, it’s really great. What we’ve always done is we’ve had a hold back circumstance, right, where we have some sort of hold back. And we’ve gotten pretty close to whatever that amount is that we’ve held back. And I’ve always kind of, you know, looked at it and said hey, what would happen if we crossed this line.

And so, you know, the intriguing part to me is, this is again, an opportunity to protect that downside. Particularly when things just come up. And in our industry, there’s warranty claims that were not discussed during due diligence and things of that nature.

Or, you know, the amount of information we were supposed to be given at a certain time just drags on or, you know, whatever it may be. Or a contract that was supposed to transfer didn’t transfer, it can be tough. So yeah, to me, I’m excited about the prospect of being able to, again, downside protect some of the things that we run up against.

Patrick: Yeah, and I think on the buyer’s side for benefits, what’s nice is if a deal is uninsured, the amount of the buyer’s protection is maybe 10%, or whatever the holdback amount is. It’s really hard to squeeze anything other than that. While under a TLPE, you can ensure a transaction up to the purchase price. And that can be a real area of satisfaction, because like you said, you don’t want to get you know, too close to that line for the escrow.

And the nice thing is, you have an insurance policy, it can replace the escrow. There is no deductible on TLPE. So there’s no worry about an attachment point to be breached. It’s all taken care of there.

Malcolm: I like that.

Patrick: So we expect to see quite a bit of it as we move forward and having conversations with organizations like yours. It is a great start. And as we’re talking about going forward here, you know, we’re getting you know, we’re in the second quarter of 2023. I mean, this is going by fast. You know, Malcolm, what trends do you see in M&A? We had a real slow start, things are accelerating. There are a lot of talks about economic headwinds out there, but what do you see?

Malcolm: I can only anecdotally say from just interacting with the business owners that I do. I mean, we’re strictly focused on Texas, I hate to say it, I get contacted, hey, I got this deal in Louisiana. And I’m like, it’s so close. But like it just is a different economic thing over there than what we deal with. And so I can only speak for Texas, and I can only speak for the business owners I’m interacting with. And I tend to interact with folks that I call the 3Ds.

That are looking at death, looking at possibly a divorce or change of life circumstances or they’re losing interest, they’re disinterested in their businesses. Kind of what I bucket them in a lot of times. So that’s our main bread and butter of folks that we’re interacting with. And candidly, I think people, I think folks are exhausted by what they went through for the last couple of years.

I think that they had a good run up for kind of post all the acts and different things that were saving people during COVID and different bailouts that were happening. During that part, I think that there was some good run up, there were some folks that, you know, just were able to add some extra layers of revenue, and so on and so forth to their business. And now I think we’re starting to settle back in.

And I think we’re starting to settle back in and say, you know, what is the business historically able to actually turn and do based on the assets it has on the books and the customer base that it previously was able to command and all that kind of stuff. So I think conversations are getting a little bit more, just a little more grounded.

And so which has been refreshing. And then I have business owners that are just killing it. I had one that’s out of Houston that we’ve talked over the last year, I thought we were gonna close the deal in the fall. He got a new contract, he said let’s hold on. I messaged him yesterday and things are even better.

So, you know, it’s one of those things. And so broadly speaking, you know, I can only speak again to Texas. I think that there’s a lot of economical growth that’s still going, but I think people are cognizant to how far they spread themselves. And I think that the awareness of your customer base is really important right now. I think more than anything, I’ve seen a lot of owners that are maybe had too much of a concentration with certain customers and they’re revisiting that.

And so I would say that, you know, generally speaking, as I’m looking to acquire, that’s the other things I’m looking at. And again, basic, you know, first principles. You know, how vulnerable is this business to an economical turn is anybody you know, in the industry is looking at, we’re doing the same thing. We’re just trying to be as pragmatic about it as we can.

Patrick: Are you finding that the, I would say the expectation levels of sellers is coming down a little bit, you know, following just the last couple of years where there was a big tremendous surge of activity. And so multiples were going up and everything was there. And now, I think that, you know, some multiples are coming in a little bit more into more market friendly ranges.

Malcolm: Yeah, I would say that. I mean, and the best way to put it, I think that people are getting grounded on what’s real, and what’s possible. And I think also, they’re willing to entertain the conversation of, okay, I’m gonna buy and hold your business. If I buy it at a six multiple here, think about what I have to do, just through creative finance to be able to pull this off. It puts your business at risk.

And so if you really want this business to last for the couple of years, like let’s come up with a structure where we both are benefiting at this point, and me paying at a premium, although there are other people that will do that. They will have to move in a different fashion to be able to get the return that their investors and folks are looking for.

And then for us, you know, long term perspectives, we got to be smart about this. And so yeah, I think that those conversations are easier to have right now than they used to be. At least last year.

Patrick: Well and also your, the needs of your sellers are a little bit different. They’re not out looking to get rich. They’re kind of looking to maintain legacies. And they’ve got the life that they want right now. They just want peace of mind.

Malcolm: That’s exactly right. Yep. They want to know that their office manager or their supervisors that have been there for 20 something years. We bought a business in October. One of my guys is, you know, he works 18 hours at this point, but he’s been with the firm for, or with the company for 41 years.

I mean, they want to know that that guy has been taken care of. And so that’s again, that’s who we tend to resonate well with. And I recognize again, that’s a unique buyer, potentially, or sorry, a unique seller, and plus we’re unique buyer. But I think that there’s enough, even in Texas, there’s enough for us to be able to do the right thing,

Patrick: Malcolm Peace, from Tsetserra Growth Partners, how can our audience members find you?

Malcolm: Yeah, you can look us up, tsetserra.com. It’s spelled t s e t s e r r a.com. You can give us a call 512-775-6589 or just shoot me an email. I’ll tend to catch it. So malcolm@tsetserra.com. More than happy to chat. We’re always looking at businesses, but we’re also looking at people that interact with business owners. Folks that are in wealth advising, tax advising, insurance space, you name it, that interact with business owners.

That kind of networking tends to come up with some pretty unique opportunities.

And then simultaneously, you know, something we didn’t touch on is I’m always looking for great people to plug into these businesses. And so that’s a big aspect of what we do. Although we’re often looking at deals, we’re also having conversations around folks that can step into these businesses that similarly believe that there’s an opportunity here to do the right thing on these businesses that have been legacies in their community.

So that’s our approach and I’d be more than happy to take any calls, conversations, set up a time to chat more. But we really, we hope that we can be in the Texas area doing the right thing.

Patrick: Malcolm, thanks again for being a guest. Really appreciate speaking with you.

Malcolm: Yeah, my pleasure. Thanks so much for having me.