On this week’s episode of M&A Masters, we speak with Jordan Tate, Managing Partner at Montage Partners. Montage Partners, based in Arizona, is a people-first private equity firm. For 17 years they have invested in established companies across North America, helping them reach transformative growth.
Jordan tells us about his path to Montage Partners, the interesting meaning behind their company name, and how it reflects both who they are and the companies they seek to invest in, as well as:
- Key strategies for selecting investments
- The biggest driver in successful partnerships
- Which questions you should ask to assure a deal is a cultural fit
- And more
MENTIONED IN THIS EPISODE:
Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority in executive and transactional liability, and president of Rubicon M&A Insurance Services. 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 Jordan Tate, managing partner of Montage Partners. Montage Partners is an Arizona based private equity firm founded in 2004. They manage $70 million in capital and invest in established successful companies across North America. Jordan is great to have you here. Welcome to the show.
Jordan Tate: Thanks, Patrick. Good to speak with you again.
Patrick: Now, we don’t see a lot of private equity activity here in Arizona. So you really caught our attention. Before we get into Montage Partners, let’s let’s start with you. How did you get to this point in your career, and then maybe trace, you know how you landed in Arizona?
Jordan: Sure. So a little bit of background, I’m 40 years old, I started my career as an investment banking analyst at Merrill Lynch, working on mergers and acquisitions, primarily with consumer and industrial companies, and what now seems like a lifetime ago. And then in 2004, I moved back home to Arizona to co found Montage Partners. And it’s been a fun 17 year journey. Over that time, we’ve now invested in 17 companies, having successfully exited our investments in eight of those companies. So we’re active investors in nine companies today, and have a ton of fun working with our partners and still view ourselves, in spite of the 17 year history, as being in the early innings of building, the leading lower middle market private equity firm in the US.
Patrick: Excellent. Now when we turn to Montage Partners, I credit you guys a private equity, that you’re not boring, you’re a little more creative in the way you name your company, as opposed to law firms and insurance firms, that name them after the owners and the founders. But what’s the story at how you came up with the name and tell us about Montage Partners.
Jordan: Yeah, thanks for asking not a question that we get all that often. But you’re right, we intentionally didn’t name the firm after any one individual. That is a reflection of our culture. So we’re very team oriented. And collaborative. The firm’s not about any one individual, it’s certainly not about me. And so the name montage comes from the fact that a montage is a picture of pictures with each of those individual pictures, being self sufficient, and unique and standing on its own. And that’s a reflection of how we think about the companies that we invest in.
So each of those companies is unique, self sufficient, successful in its own right. And together, those companies comprise the overall picture of what forms our firm Montage Partners. And then maybe the last thing I’ll share is on the partner side, that was intentional as well. So we look for a true win win relationships where it really is a partnership with the leadership teams that were backing and or the founders if it’s a majority recap situation. And while the founders cashing out significant liquidity may stay involved and continue to be an owner, what we’re looking for, are those true partners with people that we like and trust. And so that’s reflective of the name as well.
Patrick: And the the size area that you’re looking at for your investments, I would consider that the lower middle market, correct.
Jordan: That’s right. So in terms of size, we’re investing in established successful companies with one to 5 million of EBITDA. So no startups, no distressed situations. You mentioned across the US, we focus on four industry verticals. So business services, consumer products and services, industrials and technology. So one to 5 million of EBITDA, no startups, those four industry verticals. And then in terms of the catalyst for the transaction, there’s really three situations that capture all 17 companies we’ve invested in today. And those three are founder liquidity event. So whether that’s a founder seeking a full sale of the company, or a founder seeking a majority recap, where the founder may want to continue in the CEO role and or continue to be involved from an ownership perspective or a board perspective. That would be scenario one, and that’s very core to who we are. The second one is the management buyout.
So backing leadership teams with capital to buy their business from a larger organization. And there’s two examples there would be Equity Methods and Metal FX, both of which were actively investors in today, Equity Methods was prior to our transaction, a wholly owned subsidiary of Bank of America. And Metal FX was majority owned by a publicly traded utility called a VISTA Corporation. And both of those cases, we provided the capital to back the leadership teams of those companies to buy their business. So that’s number two. And then lastly, the third scenario is backing operators or independent sponsors, who have a thesis within a particular industry and or have identified a particular company and need an equity partner to support them.
Patrick: I’m just curious real quick with with the independent sponsors your your third point there, have you seen that activity grow?
Jordan: Absolutely. So definitely a trend, we think back over the past 17 years, there’s a growing universe of independent sponsors, for sure. And I think from if I put myself in a founder’s seat who’s seeking liquidity, I think that’s both a good thing and a bad thing, I think it’s a good thing because it provides another option. And there’s very high quality people out there in the independent sponsor universe. And then maybe on the on the challenging side, or something to look out for as a founder is not everyone’s created equally, right. And it’s difficult. When you’re getting to know somebody who doesn’t have a track record, they don’t have a portfolio of companies where they’ve been through the transaction process many times.
And if this is the first time they’re going through a transaction, there’s a lot of getting to know one another. And so there’s some work that goes in on the founder side to get to know the people involved, make sure that everyone understands the source of capital, and that the person sort of can successfully navigate the transaction process so that a founder who’s built a successful company, over 20, 30 years, is going to have a relatively smooth positive experience with highly emotional once in a lifetime opportunity. So growing universe, and lots of variety in terms of the folks that are competing within that space. But certainly for us, we’re very interested in doing more deals where we’re providing equity, to independent sponsors to help them close transactions.
Patrick: I think is fantastic. It’s a nice matchup with the pooled resources, like you said, if you’ve got an independent sponsor, you’re just looking at that individuals, the owner or founder of an organization with a track record, like you have, you know, backing them up all sudden, it gives a lot more credibility to the the opportunity for success.
Jordan: Absolutely great. So there’s a good compliment there, particularly when that independent sponsor plans to step in and take an operational role in the business. So sometimes, if I’m a founder, I’ve built a successful company, I don’t have necessarily a successor internally. But I’m seeking liquidity. I need both a capital provider to provide the liquidity but I also need a solution in terms of who’s going to step into that leadership role. And in a scenario where there’s an independent sponsor involved, who plans to step into that leadership role. And there’s good rapport between the founder and that individual. And then we can step in with the capital. So solving for the capital that’s going to provide liquidity as well as support growth initiatives, also speak to the track record, and then bring the shared services resources from our team. That’s a good combination, and it sort of rounds out the solution for the the founder who’s got a lot at stake.
Patrick: You haven’t done this yesterday. So I mean, the number of private equity firms, you know, when when Montage Partners started was a lot smaller than that universe now. And I’m just curious as you’ve got this long track record, how are you having gone up market for bigger and bigger deals? Explain explain your preferences, staying in the lower middle market?
Jordan: Yeah. So you’re right, we have stuck to our lane, there’s not much that’s changed with respect to our investment strategy, or size, or the qualities that we look for in companies or people that we’re going to invest in, over the past 17 years. So we haven’t drifted up market that’s been intentional. One of the reasons is, we have a lot of fun doing what we’re doing. So we like this category. It’s large, there’s a lot to do. And we love the founder transition story. We think where a founder is willing to invest the time to get to know the people and where the founder knows what market is in terms of purchase price or multiple.
And so there’s confidence going into the transaction that they’re going to be paid that price, regardless of who the buyer is. And once that box is checked, that they’re getting the liquidity they’re looking for, they’re getting a full fair purchase price for the business, then other things matter a lot. So for founders who really care about the integrity of the people Who’s going to be involved? Who’s going to represent the company on the board from that private equity firm? What’s the post close plan? And what resources can that private equity firm bring to bear? What’s the track record of that firm, and we’re the founder can jump on reference calls from other folks who had sat in their seat before. Hugely important, hugely powerful. And we like this this size, and the dynamic changes as you go up market, it gets a little less personal.
Patrick: Yeah, well, I think that when owners and founders, they get to an inflection point, and they’re looking for an exit, or they’re looking for, you know, that next step, because they are either, you know, and they’re, they’re too too big for being small, but they’re too small to be enterprise. And, you know, they’re at that point, they have to make some kind of change. And if they don’t know any better, a lot of these owners and founders just default to an institution or to have some brand name out there, or they fall over to a strategic that may not have their their interests, you know, at heart. And that’s why it’s very important that we highlight organizations like montage partners, because you offer a way out that is a real positive. And the more choice they have, particularly for these people who have, you know, taken started with nothing, and then develop, you know, build great value is great to know that there’s organizations like yours out there that can get them to that next chapter.
Jordan: As you know very well, if there’s a great strategic buyer, that is a great fit for the particular company, that could be a good option for the founder, if that’s not the case, or they’re concerned about competitive sensitivity with sharing information during a diligence process, or there’s not a great cultural fit with the organization that they’ve built. And that potential acquire, and or the founder cares deeply about that leadership team. And the folks that are going to carry the torch after they start to step out of a day to day role. aligning with a private equity firm can solve for all of those things.
Because if you’re doing your homework, getting to know the people at that private equity firm, and you’re partnering with high integrity, high quality people, and you can do those reference calls, the culture at your company is not going to change, there shouldn’t be renewed energy, but the fundamental culture is not going to change. Now you’ve got stronger balance sheet capital to support growth initiatives, potentially help upgrading finance and accounting infrastructure, help standing up pull based marketing initiatives. Help recruiting to round out the leadership team, if that’s helpful. And then uniquely one differentiator for a founder and choosing private equity as a path towards liquidity versus a strategic buyer is the ability to roll equity, if they’re interested in maintaining a stake in the business.
So for a lot of founders, you built a business 20, 25, 30 years of sacrifice, blood, sweat, and tears, and you want to take substantial cash out of the business. But at a certain threshold, once you’ve met some certain dollar amounts of liquidity, it’s oftentimes very appealing to maintain a stake in the company through that next phase of growth over the next 5, 6, 7 years. And that usually that opportunity doesn’t exist most often with a strategic buyer. But with the right private equity firm, that opportunity to maintain a stake in the business and accomplish the upfront liquidity objective is sometimes very attractive.
Patrick: Yeah, one and also that rollover, that can happen, you could end up that rollover ends up being worth more than the original liquidity event as possible, as possible. Yeah. So that I mean, what a great way, you’ve just, you’ve just gone through just all the types of things that you bring to bear. When you come into the company, you’re showing them how to scale, bring in new talent, improve processes, probably get economies of scale, in terms of costs, and so forth. The four areas that you like to invest where you have business services, consumer products, light manufacturing, and technology. Give us on each one of those buckets. Could you give us a brief profile on your ideal target note in those fields, other than other than just size?
Jordan: Sure. So maybe what I’ll do to try to be succinct and in the interest of time is this talk about the common threads that that we would look for that apply across all four of those verticals. So even though we’re investing in companies that might compete in very different industries, there are kind of fundamental common threads that we’re looking for. And so those include things like customer retention. So we’ll go back in time and we’ll review spend patterns and understand when customers were lost. What happened there? When new customers were won? How did that happen? How sticky are those relationships, so both on dollar revenue retention, and then the retention of the relationship that’s really important, regardless of which of those four verticals, we’re looking at.
Margin stability. So there certainly has to be an actionable growth opportunity, we’re not the right fit. But we’re also not chasing sort of the shiny object, the next new thing, we’re looking for companies that have a fundamental value proposition, they have high revenue retention, sticky customer relationships, ability to generate consistent a consistent margin profile. So that means when say for a manufacturing company material prices, right now are going up across the board, the ability for that company, on balance to pass through those price increases to their customer shows up in gross margins, right, and it says a lot about the value add of that company and the relationships they have with the customer base. So those things are important things like competitive position within the industry.
But then at the end of the day, past all those quantitative metrics, ultimately, the biggest driver of our decisions to wire funds that close are the people we want to work with people we like and trust. High integrity is high integrity, whether we’re talking about a manufacturing company, a consumer products company, a professional services company, or a software company. So at the end of the day, there are quantitative metrics that we look for. And they’re common threads across those four verticals. But ultimately, it’s it’s the the integrity and the personal fit the culture of the company and the enjoyment working together that should be there for both sides. Otherwise, it’s probably not the right solution.
Patrick: Well, you touch on one area, on that key thing with the integrity that I consistently see with everybody I speak with, and that’s you cannot eliminate the human element in mergers and acquisitions. Okay, there, there is not, you know, the news where Amazon buys Whole Foods. It’s not Company A, Company B. It is a group of people choosing to partner with another group of people. And if everything works, you know, one plus one equals six. And so that’s something that resonates for everybody I’ve spoken with it, that’s the determining, determining factor is the people.
Jordan: 100% agree. And I think the best outcomes are those where both parties spend sufficient time, which doesn’t mean a transaction needs to drag on for months on end, but spend sufficient time getting to know one another, beyond walking through the line items on an income statement, but really getting to know one another, getting to know one another’s goals, and confirming that if it’s a founder that’s seeking a full exit, I’ve poured a lot of cases my entire life into building this company. Are these the stewards of my business that I’m going to be proud to hand the keys over to? Or if if somebody who’s doing a majority recap and is going to stay involved?
Do I like these people? Do I enjoy working with these people? Am I gonna have fun at board meetings, it’s just gonna be a fun process over the coming years, or am I just looking for liquidity at close, and I’m going to dread every conversation with my new partner post close. In those situations, we’re typically not going to be interested. So we really do want there to be a good two way fit. And that sets up a win win partnership. And the most attractive opportunities for us are those where the seller is spending as much time being selective, doing reverse due diligence during those reference calls getting to know us, and vice versa. And we confirm that there’s just great alignment, and it’s going to be a fun partnership post close.
Patrick: One of the things that struck me, you’d mentioned through the process as your research, I would just think as your owner and founder, in most cases, your attention all your focus is on your company and getting out there just day to day, getting sales done serving customers, things like that. But then you get through go through the diligence process. And you’ve got the opportunity where somebody else is looking at your numbers and looking at him with a different perspective. And I’m just curious, when you’re talking about customer retention and things like that. I imagine if I were going through that process, I would probably have an epiphany or two about my firm, and by somebody else coming in as a partner with me, say, hey, here’s some areas for you of opportunity. Did you know this and they could be right in front of me, but I didn’t see him. I’m just curious. Have you experienced that with your investments where you just created these aha moments with with your targets and all of a sudden they were just really excited because oh, I didn’t even see this. We can do this tomorrow.
Jordan: Absolutely, it does happen. So there are situations during the due diligence process, when that post goes plan is starting to be formulated, and everyone’s collaborating on for the areas of focus and where the investment is going to go post close. And it’s fairly common for. So we’ll do playback sessions where we’ll take our analysis, we’ve cut up the data, and we’ll play back our conclusions. Hey, here’s what we think we’re seeing in the information. Here’s our conclusions we’re drawing, tell us where we’re right, tell us where we’re off. And that’s part of our process of getting educated on the business during due diligence. But I think as a byproduct of that, what you’re describing absolutely plays out where the founders saying, well, intuitively, I knew that, but I’ve never seen it sort of quantified. I’ve never seen it presented that way. And that then leads to additional ideas. And it’s a fun collaborative process.
Patrick: I just think that hits the ground running where and outside of M&A they’re the people say, well, somebody’s got a big liquidity event. So they’re probably just going to kick back now and stay, you know, run out their time. But I think this is just invigorates management, saying here are these new options, we never realized, and they’re right at our fingertips.
Jordan: They can go both ways. Yeah, depending on the founder’s objective there, we have certainly invested in companies where the founder was very transparent that my goal is 100% liquidity. And I want to step away from the business as soon as possible. And depending on the composition of the leadership team that’s there, we can come up with a plan, whether it’s immediately at close or over some transition period for the founder to do that. But there are a lot of other cases where the founders objective is to take out a significant amount of liquidity.
But they are energized about the future, they do want to help scale the company to the next level, they want to partner to support the company with capital, but they also want a partner who’s going to be value add and roll up their sleeves and help execute on that roadmap. And both situations are fine. But certainly that situation where the founder is checking the box on the liquidity objective, but is re energized in the business about taking it through its next phase of growth. Those are really fun situations. And that’s part of why we love doing what we’re doing.
Patrick: I can imagine, you probably have a case or two where owner was going to check out after 24 months and things are going so much funny, just you know, I’m gonna stick around a little longer.
Jordan: That can happen.
Patrick: Okay, great. With with deals down the lower middle market, you’re dealing with owners and founders, and I mentioned the human element in mergers and acquisitions. And one of the things that comes up is, is fear. And it happens to there’s a lot of stress and a lot of drama, in mergers and acquisitions, because you get a lot of money at stake. And also this is, you know, a once in a lifetime or generational event for these owners and founders. And there’s a conflict there and is created not because there’s anything bad, it’s just you have one experienced party, which is the buyer who’s going through these events many times. And then the seller where this is their first this is their first time and it’s with their own money it’s their own, you know, business online.
So there’s a lot of tension to make sure that things go smoothly. And just things start coming up that probably the the owner founder didn’t expect. And that creates stress and you go through the diligence process. And then you get to this area called the indemnification conversation where what the with the buyer says is look, you know, we’re making a bet on this, we just need to protect ourselves. You know, if if something goes wrong post closing that we didn’t know about, we need some way to get remedy we need some way to just you know, limit our exposure on this this is market this happens everywhere. It also we need to go through this process.
But what the seller hears is okay after I told you everything I know, I cooperated in diligence. And now you’re telling me that even though I told you everything I know, I can be on the hook for something I didn’t know about? Why should I pay for something you missed? So you can get attention in their what’s been nice as the development in the insurance industry of what’s called rep and warranty insurance. And it’s an insurance policy, it literally steps in the shoes of the seller that says okay, based on the buyer’s diligence of the seller reps, if any of those reps end up, you know not being accurate and that inaccuracy costs the buyer buyer instead of going to the seller to pull back escrow funds or get remedy come to the insurance company, the insurance company will come in there and pay your loss.
Buyers like this because they get certainty of collection if there is a breach without you know, much, much waiting time. Sellers love it because they get a clean exit. They don’t have to worry about a clawback. They don’t have to worry about a large escrow the insurance policy covers most of the action escrow or if not, you know, there’s not gonna be a further clawback beyond that. And so it’s been a nice, elegant solution that removes the tension and removes the conflict, particularly when you want to start transitioning into integration, you know, post closing, and so forth. So it doesn’t step in in that way. And so it’s been nice.
The news is, in the last year, this product rep and warranty insurance is available for deals as low as $15 million in transaction value. It was usually reserved for nine figure deals. And the more that parties are aware of the availability of this, the more active they can get it and engage in the perception now pre COVID was only for the big guys it’ss not for our lower middle market. Not the case. And this is right, right in your area, Jordan. I’m not sure you know, good, bad or indifferent. I mean, don’t listen to me, good, bad or indifferent. What experience have you had with rep and warranty?
Jordan: That well, you summarized it well. And we can empathize with being on both sides of the table. Because we as a seller, we’ve been in that seat before. And certainly as a buyer, that’s what we do every day. So fully appreciate the value that reps and warranties policy brings to the seller in particular, but both parties in terms of smoothing the way to not wrangling too much within the reps and warranties section of the purchase agreement, which is where absent of reps and warranties policy, the majority of the time is often spent negotiating specific wording within that reps and warranties section.
So going back, so we’ve been investing 17 years now, going back 10 1215 years ago, the introduction of reps and warranties coverage was really suited towards transactions that were significantly upmarket, from where we’re investing. And so more recently, like you mentioned, it’s become more common. And it’s also become more common in our internal dialogue. So we have not purchased a policy yet. But it’s, it’s becoming increasingly common for that to be part of the discussion. And I suspect as reps and warranties policies become more widely available for the size of transactions that we’re investing in, which generally are in the five to $30 million enterprise value transactions. It’s only a matter of time before we’ll introduce that, as a solution.
Patrick: Jordan, as we’re going through, we’re recording this right about midpoint of 2021. And I it’s safe to say we’re probably at the beginning of the end of the pandemic, and there’s activity going on and everything. From your perspective, what do you see either M&A in general or Montage Partners in particular on, you know, what are your thoughts on trends going into end of year 2021?
Jordan: Yeah, interesting. So a couple things. One, high valuations is a very widely covered topic right now. So it’s a good time to sell if you’re a founder. But I’m not going to focus on that one. Because I think that’s pretty, pretty widely covered out there in the media, the potential likelihood of a capital gains increase is also pretty widely covered and expected. So many more, two more interesting trends that I’ll comment on are one you touched on earlier, which is the growing universe of independent sponsors. So like we talked about, that creates another option for a founder seeking liquidity, but it also creates some homework in the sense that you got to be careful. There are folks within that universe who aren’t as experienced as others who compete in that universe.
So you got to get to know the people and understand the source of funds. And that takes time to invest. And then the other interesting trend is, I would say, over the past 17 years, since the inception of our firm, within the lower middle market, sellers have become more sophisticated. And what I mean by that is looking beyond price. So when when a seller truly has a good sense for what’s market, how the transaction process works, whether that’s because they’ve done their own homework independently, or whether that’s because they have a great M&A attorney or an investment banker involved, somebody who’s giving him good advice. They know where companies like there’s trade on a multiple basis, they know where purchase price should be.
And so as long as they’re checking that box and accomplishing their liquidity goal and getting a full fair purchase price, becoming more sophisticated about that next layer of getting to know the people like we talked about earlier, so we see founders increasingly spending more time getting to know us as buyers, which is great. Doing reference calls asking for introductions to other founders who have entrusted us with their baby that they’ve built. And devoting a lot of time to talking about the post close plan, evaluating things like is there a good cultural fit so even though as a investor, we’re different from a strategic buyer that’s going to come in and integrate the company.
We have our own culture at our firm, and the founder who is concerned about making sure that there’s a good cultural fit among the people who are going to be on the board representing that private equity firm at their company, that that meshes well with the culture of the people who are at their company that they care deeply about, in most cases. That’s time well spent. And we’re seeing that become increasingly common. So beyond high valuations, the potential for increasing capital gains. The two things that come to mind there that are maybe more interesting are sophistication of sellers and the time spent evaluating the people who are involved, and then also the growing universe of independent sponsors.
Patrick: That’s real interesting. This is the first time I’ve heard that with, you know, the sophistication, the education of sellers. And I think that’s probably their sophistication of their knowledge base growth is leading to more successful mergers now.
Jordan: I think that’s right, I think there’s better information out there, it’s more easily accessed. And therefore, relative to 15 years ago, if I’m a founder who’s built a successful company in my industry, but I’ve never been through an M&A transaction before, I can learn much faster today than I think was easy to do 15 years ago, because of the prevalence of information that’s out there.
Patrick: And also news gets out within the M&A community, if you’re an organization is making acquisitions, and they and you’re, you’re not as good at integrating post closing, that word gets around, people learn about that. And so sellers aren’t necessarily looking at the top number on on the LOI. They’re they’re looking deeper, which that’s very, very encouraging.
Jordan: Absolutely, you hit the nail on the head, I mean, one of those areas to be cautious for as a seller is sure you get that indication of interest, you get the indicative terms, you get the LOI. And headline, enterprise value says this, you’re comparing one against another. Look at the structure, and then also get to know the people involved. And back to that integrity point. And the track record point. Does the firm you’re talking to have a history of retracing or changing purchase price or really grinding later during the purchase agreement. And some firms do and some firms don’t.
And some firms like we pride ourselves on taking a long term relationship oriented approach where we can serve up reference calls with anyone we’ve bought a business from before, because we pride ourselves on doing what we said we’re going to do treating people well. And 5, 6, 7 years post closing, we want to have a positive relationship with that founder. Because we take very seriously the fact that it is an emotional once in a lifetime event. And we take our stewardship of that company very seriously. Not everyone does. And so spending the time to investigate that I think will it’ll end up paying off in the long term because of the importance of the event and ultimately be worthwhile and make for a smoother transaction and a better partnership post flows for everybody.
Patrick: Well, that’s no surprise that Montage Partners has been doing this for 17 years. Very, very clear. Jordan, you’ve got a great story. Montage Partners has a great story. How can our audience members find you?
Jordan: Sure. So it’d be firstly on our website, which is montagepartners.com. So that’s www.m o n t a g e p a r t n e r s dot com. www.montagepartners.com. There’s a contact form there. We have team bios there so it’s easy to find contact details for anyone on our team and reach out directly. You can also find us on social media. So LinkedIn, Twitter, Facebook, and reach out that way as well.
Patrick: Well, Jordan Tate of Montage Partners in Arizona is our first private equity firm in Arizona that we’ve met. Real pleasure having you Jordan, and I wish you all the success as we go forward.
Jordan: Thanks, Patrick. Appreciate you having me on, and good to speak again.