There’s enormous opportunity in professionalizing and scaling founder-owned businesses.
But what does it take to become a leader in this area?
In this episode, I’m joined by Heather Madland of Huron Capital for an inside look at the firm.
We’ll also discuss:
● Opportunities in the service sector
● M&A in the Midwest
● The history of Huron Capital
● Heather’s take on reps & warranties insurance
● And more
Mentioned in this episode:
● https://www.linkedin.com/in/heathermadland/
● https://www.huroncapital.com
● hmadland@huroncapital.com
Transcript
Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and president 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 Heather Madland, who serves as partner of Business Development at Huron Capital. Based in Detroit, Huron Capital brings a Midwestern perspective and Motown metal to companies committed to the next level of excellence and growth. Heather, it is a great pleasure to have you. Thank you for joining me today.
Heather Madland: Well, thanks, Patrick, for having me. I’m excited to be here.
Patrick: Before we get into the Midwestern magic that you guys can deploy at Huron Capital, let’s start with you. Give us a perspective. Tell us what brought you to this point in your career.
Heather: Oh, boy, I’ll give you the short version. Because I think folks know me well enough to know, I like to talk. So I’ll go all the way back to my birth. No, I’m just kidding. I’m kind of though I will. Fun fact about me, because it actually sets the stage well for I think, where I, where I have excelled in my career, but I’m a quadruplet. So I have two sisters and a brother. Patrick, did you know that about me?
Patrick: I didn’t know that. That’s how we learn things. And we’ve known each other for five years. Okay.
Heather: I know, I know. So I was one of four. My mother thought she was having triplets, and, you know, my sister was hiding. And she ended up with four. So I like to tell people I learned at a very early age, how to use my voice and speak up. And I think that that has helped me in my professional career. I started out as a liberal arts major at college, at Cornell University. And so big shout out to liberal arts, my managing partner Jim Mahoney, and I joke about this all the time that you just got to learn how to write, be critical thinkers, have a passion for learning.
And really that set a fantastic foundation for my career in finance, believe it or not. And so coming out of Cornell, I went into a credit training program at Comerica Bank in Detroit. And fast forward, you know, 15 years I spent, you know, time in Chicago and San Francisco on the debt side of the balance sheet working for finance companies and commercial banks financing, leveraged buyout transactions for middle market private equity firms. And fun fact, my very first LBO was for Huron Capital. It was YORK label. One of their first deals out of fund one in 2001, their largest debt transaction to date then, that they had closed and they were five people.
And, you know, one of my, one of my big things about my career and keeping in touch with people is don’t burn bridges. And so, you know, we’ve kept in touch over the years, and I guess, you know, my career came full circle. Back to Detroit, Michigan, I so my, my first 15 years was really on the debt side, but it went from execution and underwriting to leveraging my voice and my personality, I guess, into more of a business development role in debt. And then, you know, came home to Michigan joined Huron in 2013, which is almost 10 years ago and joined the equity side. Deal sourcing and running marketing communications. And I’ve got got a lot of hats, but it’s been quite the journey.
Patrick: And now the role of private equity was a lot smaller when Huron Capital opened up. And so it’s gone through a lot of changes. But before we get into that, let’s talk about Huron Capital. I mean first of all, the nice thing is that it wasn’t named after the founders, like virtually every law firm out there. Pretty much every insurance brokerage too. But you know, give us a
story about Huron, on how it was named, and then and then just a quick history.
Heather: Sure. Yeah. I mean, and I appreciate you pronouncing it correctly, Patrick, a lot of folks on the coasts, you know, Huron is is an unknown, unknown to them. So, but to those of us in the Midwest, given our roots here. We all live in the greater Huron Valley for those. For those listeners that don’t know, we’re part of the Huron Valley, Michigan, Ohio and Illinois. And so it was a shout out to our Midwestern roots. And it’s also reference to Lake Huron, which is right in our backyard as well as one of the Great Lakes.
So not that, not that complicated, pretty straightforward, but it’s, yeah, we’ve always been Huron Capital. It was founded, founding partner was Brian Demkowicz he joined us from Chicago at the time, and we, you know, we’ve raised over a billion eight across six funds since 1999. I you know, I’m proud of the fact that we have been around for more than 20 years. I think we’re in rare air a bit. Many private equity firms don’t make it as long as we have. And I’m just very proud of the fact that the team has stuck together and, you know, has has been together that long.
Patrick: Well and the default, a lot of people think when you’ve been around for 20 years, you must be this massive institution, looking at mega deals. And, you know, the quite the contrary. You are lower middle market. Let’s talk about that. Why for so long have you stayed in that space and not, you know, expanded as a lot of other firms do and go up market?
Heather: Look, I mean, I think really early on, we were one of the very first firms to, to jump onto this buy and build concept of making add on acquisitions. And for our entire history, we have been focused on professionalizing founder owned businesses, and getting them ready to scale through M&A. That has been our M.O over and over again, since the day we were founded. We have closed at this point over 450 transactions, and true to the buy and build focus of ours, over 70% of those were add ons to about 57 platforms, since the day we opened our doors.
So it’s a strategy that we have been employing over and over again. And when you target founder own businesses, and for the value creation levers that we’re really good at, you know, augmenting the management teams, building out a sales structure, you know, professionalizing, the finance department, really bringing that, you know, we call it finishing school is how we like to talk about it. Lots of founder owners wear a lot of hats. And when you want to grow and accelerate growth, you know, you got to be able to have people who own various parts of the business.
And that’s really what we’re good at Patrick in, in what we have done so, so many times over the years. And in the lower middle market, there is such an opportunity from a size perspective. And I think our approach, our Midwestern values, the way that we treat our own people, our management teams and their employees, you know, we do the right thing, we’re good folks over here. And that really resonates with founder owners, when they’re really looking for the right partner to grow their business and take it to the next level. You can’t quantify that. You can’t, you know, put a multiple on that. But, you know, with a lot of private equity firms out there today and lots of capital, I think, you know, that has been our number one differentiator as a firm.
Patrick: A couple of observations, and I think that you can’t measure it. But it’s true about when you speak with anybody from the Midwest. You know, they say what they mean, they mean what they say. That resonates, there’s a connection that you can make, because remember, you know, mergers and acquisitions aren’t all the types of deals that we hear about in The Wall Street Journal, where’s it’s Amazon buying Whole Foods. It’s not company A and company B. It is a group of people agreeing to partner with another group of people. And hopefully, the combination one plus one equals five or six. And so you can’t get that human element out of it. So I think that’s a great way, and I, can we assume that you’re not exclusive to the Midwest. Your region is all over the place, but a lot of what you do is in is in the middle of the country?
Heather: Yeah. I mean, we certainly we resonate, our approach resonates with founder owners
and other advisors in the Midwest. But, you know, we do deals all over the country and have for our 20 plus year history.
Patrick: And I think is what’s important, why I really want to highlight Huron Capital because we’ve known each other for over five years now. And I’ve only been in M&A that long. But where it comes in is that you’ve got a lot of these companies and owners and founders, they get to that inflection point where, you know, they’re too big to be small, but they’re too small to be enterprise. And where do we take the next step. And they have no idea of, you know, the skill set that’s necessary to go from $20 million in revenue to 100 million. It’s a completely different skill set, new team members. And there’s organizations out there like yours that are dedicated to that segment of the market, not just size for culture wise. And I think that’s invaluable, because the alternative is you default to a strategic maybe or like a massive strategic or you default to an institution that may not have your best interests at heart.
Heather: That’s right, that’s right.
Patrick: And so I’d say let’s talk about this. You know, you had mentioned a couple of things in there. But I really want to highlight particularly with the executive staff in the training there is what are some of the things that Huron Capital brings to the table for lower middle market companies?
Heather: Sure. So you know, we will talk about this a little bit, but we’ve recently gone through a honing of our investment strategy to be more focused on services specific services sectors. It’s an area that we have spent a lot of the last five or six years playing in. So in some ways, it was more of an acknowledgment for what we’ve already been doing. But in a market that is flush with cash, and 1000s of private equity firms, you know, it really resonates with people, when you have a sector focus or a specialization. And we go to market through the investment team who provide dedicated sector coverage.
So there’s 10 sectors, I’m not going to go through them, but they’re focused broadly across commercial and industrial services, professional services and, and consumer services. And when you’re sitting in front of a founder owner, you know, and you’re bringing an executive from the industry that has built the largest public company in its market, right. Or, you know, you’re asking questions that other private equity firms or other buyers aren’t asking, you know, you show them that you really understand their industry, their business and their market.
And that goes a really long way in terms of building that partnership and relationship that I was talking about before that is so important, you know, in a process. And I think that has really driven a lot of great success in terms of getting founder owners to say yes to us. So that’s been great. And I would say the other area where, you know, we sort of combined this, you know, people focus in our services, and our sector focus is in a really unique program that we call exec factor. If anything, we’re going to start doing more of these. But as part of our strategy evolution, we doubled down on this exec factor strategy.
And it’s simply CEO and or thesis first. So lots of private equity firms get a deal on their desk, just like I’m a business development professional, I get, you know, 10 to 20 deals a day. And flipping through it figuring out whether we like it or not, this is the opposite. This is taking, you know, the secular trends, that we’re seeing, the executive networks that we’re building, and leveraging, the thought leadership that we have in our areas of focus. And it’s, it’s deriving themes and theses from those sectors, like facility services, where, you know, we have a very strong track record or environmental services.
And, you know, it’s partnering a thesis with a CEO and underwriting that thesis, almost like we would underwrite a company and diligence a company, but before we even know what company we’re going to buy. So we’re pre committing capital against a management team and a thesis, and we’re going to market looking for a company. And when you approach a business owner,
with, you know, a holding company that has been established and a thesis and, you know, a management team and operating resources. I mean, that is, that is huge. And I think that puts us, we punch above our weight, when we sit down with the business owner with a $15 million revenue business.
I mean, that is a very differentiated approach in this market. Especially the lower middle market where we’re, you know, we’re willing to start small, you know, and professionalize and build out a corporate infrastructure. Investing in the business and seeing that EBITDA, like the J curve, almost go down before we start, it starts going up, right. And taking some risks, but are comfortable doing it because we know that industry so well after underwriting it. So that’s huge. You know, that’s a huge differentiation to founder owners, particularly in the lower middle market.
Patrick: Two questions from that. But I think the one thing that really struck me is how the focus on service, the service sector and I think that’s just so forward thinking because a lot of our guests and we’ve been involved in a lot of people that are focusing on manufacturing. And since four years ago, there was this, you know, renaissance of manufacturing back in the US. Before every manufacturer, there are several services that they that they rely on. And I can see because there’s the macro direction, a lot of people the thing is, we’re no longer a manufacturer, we’re into servicing and professional services. While manufacturing is coming back. The service sector is still just, I would say wide open. I think you guys are really ahead of the curve on that. That’s really, really impressive.
Heather: Yeah, well, private equity is nothing but opportunistic.
Patrick: Innovation comes, yeah innovation comes very, very quickly out there.
Heather: And I think the pandemic drove a lot of that and, you know, and I’ll give you a great example. Residential Services is an area we’ve been investing in for several years. We own a company called Hanson’s here in Michigan, which is we’d love to own more businesses in Michigan, but that’s the only one we have right now. And we replace windows, siding and roofing, you know, for homes.
Patrick: I’m sure that happens a lot in your climate. Yes.
Heather: Yeah, it’s all replacement, right. These aren’t new homes being constructed. But when you have a leak in your roof, and that roof just has to go, it’s gotta go. Yeah. And, you know, we knew that there was a lot of activity in this resi HVAC and plumbing. So the interior of the home versus the exterior of the home. But that market has just gotten so overheated and competitive. And the multiples there have been rising quite dramatically, even in the uncertain economic environment we’re in. And so we took a different perspective. We sat down, and part of our thought leadership in resi services was like, let’s do a scrum session around what are all the services that, you know, we as homeowners use and need. And with the millennial, you know, the millennial population getting ready to buy their first homes, you know, it’s a very much a do it for me, culture versus.
Patrick: It’s not a DIY.
Heather: DIY anymore. So what are we having done at our homes that, you know, we can really look at. And so we made an investment recently in a company called ExperiGreen, which does lawncare services for residential properties in the Midwest. And I’m not talking about kind of the commoditized mow and blow service.
Patrick: Mow and blow as we have out in California. It’s all mow and blow, yeah.
Heather: It’s all mow and blow, right. This is weed and feed. I mean, we got lots of lots of that
going on here. It’s pest control, it’s aeration, it’s fertilization, it’s tree and shrub services. And, and so that’s been I mean, that’s a subscription based model with a with a high recurring service, and a high retention of customers. And, and we partnered with our operating partner in resi services, Dave Alexander, who turned around True Green from negative EBITDA to over 100 million in EBITDA. And we partnered with the management team out of Scotts Lawn Care that built that business then sold it to True Green. And, and that’s the management team for exec factor, right. And we’re willing to buy something really small and take advantage of the market dynamics and this fantastic leadership team, to scale a business quickly.
Patrick: Well and it’s great, because you don’t have to be this well established platform to be attractive to Huron Capital, because as you’re buy and build there, there are a lot of smaller players that are out there that can tremendously benefit, just like there are larger brothers and sisters out there with getting that in. So I just think you’re opening the portal wider than some of the others out there.
Heather: But it is fascinating, like you hear about HVAC and plumbing all day now. But you are starting to read about several private equity backed lawn care platforms now. And so while we never like being you know, venture capital investors, and you always pause when you’re the first one into a sector, right. But you know, we like being at the early end versus already, there’s 50, private equity platforms that we compete against for add ons, you know, this is where we came in a little bit earlier. But that’s all because of our focus, and thought leadership and being able to identify opportunities, and niches early. Earlier than the next private equity firm, so.
Patrick: You’ve got all those all those service platforms going. So I think that’s just, this is why we want to highlight this to get this out to to the world, and I really appreciate this. There’s been a development in you know, in M&A sector with regard to insurance. Because the issue is just how do we transfer risk as much as we can. And there’s been a product called reps and warranties insurance, which has really, you know, assisted in the acceleration of the processes. And, you know, they’ve delivered a lot of that added value, but you know, don’t take my word for it. Heather, good, bad or indifferent, what is Huron Capital’s experience with rep and warranty?
Heather: Oh, it’s, it’s fantastic. It’s a fantastic tool that we certainly leverage, you know, quite often, especially for platform investments and larger add on investments. You know, and especially when the seller is pushing for it. And we could say, no problem, we got this. But it really does, you know, it we evaluate using it based on a number of factors, you know, seller preference, which is most often the case, frankly. They’re protecting themselves from future, you know, liability indemnities that may come up. It could be our preference, it could be driven by deal size and timeline.
You know, it can save a lot of time in a transaction when you’ve sort of pre negotiated those reps and warranties, right? You don’t have to deal with it in the purchase agreement. You know, you want to see how many third parties you have involved in a transaction and what the deal process looks like. Is it a differentiator because others aren’t doing it. And so absolutely a tool that we use. I can’t say we do it for every transaction, but absolutely the larger ones and, and ones where you know where it matters and where it’s useful.
Patrick: The vast majority of the acquisitions you were dealing with owners founders that are going to transition over, or do you have a lot of people that are looking for an exit? What’s the, what’s the balance?
Heather: Oh, the vast majority are transitioning. They’re rolling over a portion of their equity to get that second bite at the apple, for sure.
Patrick: Perfect. And that’s where I think that I always thought of rep and warranty is just a real elegant solution. Because the last thing, and this happens in Silicon Valley with the tech companies. The last thing you want to do is you’ve got this rockstar team of executives coming
over, they’re enthusiastic, and they’re looking forward to cashing out their escrow. And then you’ve got the bad news of saying, sorry, there was a breach, we’re taking all the money. And there have been, quite frankly, dilemmas where the company just says, do we really want to, you know, why don’t we just take the hit, because these guys are really good. And if you’ve got the rep and warranty, you don’t have any defensiveness, you don’t have any of that. And so it is very important for especially the people coming on board.
Heather: Absolutely, absolutely. It’s definitely a tool that we leverage often.
Patrick: One of the other factors here, not to sound like a commercial too much, but one of your factors was size of the deal. And there are some times where the cost doesn’t justify, the expense doesn’t justify doing it on certain deals. And you do so many add ons. What’s a great development in the market now is the emergence of a sell side policy, that essentially, the seller purchases. The policy is triggered, if there’s a breach, the buyer just notifies the seller of the breach, policy is triggered in response and negotiates with the buyer. So that they go ahead and get get the claim settled, and so forth.
So the buyer gets, you know, that they’re going to get made whole. So they got to show some collection without having to do it. Seller is now, they relieve themselves of the cost of liability. And these are available for add ons priced between a million and 30 million in enterprise value. So it’s fitting that nice little, you know, blind spot for rep and warranty where it should be more prominently used on the larger deals.
Heather: Indeed. I think that solves a huge, I’d say vacuum in the market historically, Patrick, which is fantastic, right? Especially for a firm like ours that that does two to three dozen add on actions a year.
Patrick: And on top of that, I mean at a cost of 15,000 to $20,000 per million in limits. You know, so you can insure something for a fraction of what a rep and warranty costs. But at that, our experience right now, it’s only been a year, but sellers are not only eager, they’re giddy to be able to have that, have that taken care of.
Heather: I can imagine.
Patrick: So with this, let’s talk about real quick. Give us an idea of your ideal target. What is Huron Capital looking for right now?
Heather: Well, so certainly within our sector focus, and so I mentioned C and I services, professional services and consumer services. But there’s specific sector niches beneath that, of course, so certainly within our sectors of interest, you know, I would say if it’s a deal coming through the door from a referral source, or we’ve been introduced to a company, you know, at least five to seven of EBITDA is sort of a sweet spot for us. And founder owned, of course.
Somewhere where we have an angle where we have operating resources, or can leverage existing knowledge or experience in that sector. Certainly a fragmented market where there’s a buy and build opportunity. That is, that is something we look for every single time. Yeah, I mean, those are the key ones in secular trends. I mean, look, we’re not, you know, turnaround, folks, we’re not trying to take a business, and that’s losing money and turn it into a profitable one. We’re looking for businesses that are already in industries with with some secular tailwinds.
Ones that are going to be around for a long time that there’s a reason for them to exist. And the beauty for that, for us is that, you know, going into an uncertain economy, which I feel like uncertainty is the is the only word I know to describe what we’re in today. You know, our services businesses tend to be very mission critical. We like highly technical, skilled labor, in terms of the types of services that we offer. And so those tend to be more resilient.
Patrick: Non discretionary.
Heather: Yeah, they’re non discretionary. If you have, you know, if you have a fire alarm in your building, you know, there are regulations around how often you have to test that and monitor it to make sure that it’s working properly. And you know, that is recurring revenue that creates a lot of sustained and consistent profitability. Of course, private equity loves that dynamic, right? And so for us if there’s an opportunity to build a recurring revenue model, you know, to drive efficiency throughout based services or multilocation, to drive some tech enablement, and professionalization, as we talked about in the finance or in the management team, I mean, all of those things are attributes that we look for in businesses that we’re investing in.
Patrick: Gotcha. And you were just so well, segueing us into this next question. You mentioned uncertainty. I asked all my guests, I mean, what trends do you see going forward? I mean, now we’re looking at 2023, almost 2024. When you think about this, and you’ve got all these macro headwinds out there that everybody’s reading about. Do they apply to what your your area of focus? And what do you see going forward? Either Huron Capital or macro, however you want.
Heather: I mean, it’s a great question. If, you know, we all have crystal balls, this, you know, this would be great, but we don’t. Look, I mean, I think we’re, we’re, we’re in a market that is uncertain, still with lots of capital, and it’s a job full market, right. We’ve got some significant challenges like supply chain, labor, inflation, rising interest rates. And, you know, I think we believe that the sectors we invest in the companies that we have, will be resilient in this, in the face of these types of challenges. I think, you know, our companies tend to have pricing power, given how non discretionary the services are, and the retention rates are high.
And so, you know, we feel like if we’re, if we’re addressing the current market challenges, they can’t go on forever. So at some point, one, something has got to give in terms of the job market, labor, or supply chain. And we can only benefit from that, even if revenue or demand is flat to slightly down. You know, we think that the activities that we have done to address those challenges in our businesses today will bear fruit in the future. You know, I will also say that, I think, a little bit of uncertainty, and is a good thing for the market today. We have been on a tear in terms of M&A and recovery since the Great Recession.
And sometimes it’s nice to just take a little air out of the balloon. You know, there have been some silly multiples in certain industries. And sometimes they’re, you know, they’re well deserved, but in many cases, they aren’t. And, you know, I think it’s always not bad to see some normalization on, from a valuation perspective. And we all know, rising interest rates will help us, will help us do that. I don’t see us, you know, valuations cratering, but I do see some normalization. And some folks taking a breath in terms of deploying capital after last year. And so, you know, assets are fine and are probably doing okay.
And, you know, even with leverage, slightly lighter, I think those businesses will continue to see good valuations. But, you know, I think the market is slow in the fourth quarter, and folks are waiting, they’re just waiting to see. And they’re certainly pitching. Banks are pitching because they want to see, and they want private equity firms and sellers want to be ready for when the market opens. You and I both know how quickly the market, you know, perception can change. And right when we feel like there’s a sense that it’s opening, I think we’re gonna see a flood of activity hit the market, whether that’s the first, second or third quarter of next year, we’ll find out.
Patrick: Would you think and again, completely off scripted. But would you think that there’s kind of a pause as we get through this fourth quarter? Like, let’s just see what things look like on the other side? Is there an element of that?
Heather: 100%. 100%. Both from the debt and the equity. I say, I think the debt markets are causing probably the most disruption, particularly in the upper middle market. You know, 25 to 30 million in EBITDA above has seen some dramatic volatility. And so lots of those lenders are
just pencils down for the rest of the year, waiting to see what happens. And deals of that scale and size, that have financing in place that are willing to you know, to stay in and refinance with a new buyer. Those are the those are the opportunities getting done right now, but yeah.
Patrick: I mean, there’s a lot of stuff and it’s one of those where there’s a book called The Obstacle is the Way where when we have some new challenge, like the interest rates, you have to change your playbook. And sometimes that opens the door for more innovation and that’s not a bad thing.
Heather: Yeah, I mean, I think we’re, you know, we’re just like when the tax laws changed a few years ago, and we all rush to better understand them and then maybe sell companies ahead of a potential change. I mean, if we’re nothing, if not adaptable to changing market conditions. You know, we’re all looking at interest rate hedging. You know, we haven’t had to think about that for a decade, right. And so, you know, there are tools in the tool chest that we have all used before. It’s time to sort of pull those out and get creative. And, you know, that’s what we’re doing.
Patrick: I mean, great insight on all this. Heather, how can our audience members find you and Huron Capital?
Heather: Sure, absolutely. So to learn more about Huron, please go to our website, www.huroncapital.com. My name is Heather Madland. My email address is hmadland m a d l a n d @huroncapital.com.
Patrick: And it’s a great intuitive new shiny website so great. I’m very aware and sensitive to websites because we’re planning ours, so.
Heather: Never an easy lift but I am sporting the new you know, Huron blue color here. So if nothing I’m a champion of the new color.
Patrick: Very good. Well, great. Well, Heather, thanks for being here today. And we’re going to talk again.
Heather: Patrick, thanks so much for having me.