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Justin Smith | Scaling Family Businesses

Why do M&A Masters love the lower middle market?
You get the opportunity to aggressively scale family businesses…

In this episode, I’m joined by Justin Smith of LongWater Opportunities, a private equity firm based in the Midwest.
Justin’s firm has firsthand experience growing family businesses, and he’s here to share his expertise.

We’ll also cover:

● Why great management teams beat excellent business models every time
● Investing in the Midwest
● What Justin looks for in a business
● 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. 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 Justin Smith, Director of Business Development for LongWater Opportunities. LongWater Opportunities is an operationally focused private equity firm that targets control equity investments in American manufacturing companies across the lower middle market. And so it’s a great thrill to have you here, Justin. Welcome to the show.

Justin Smith: Thank you for having me.

Patrick: Now, before we get into LongWater Opportunities, let’s just start with you. Give us a context here, what brought you to this point in your career?

Justin: Sure. So I like to say my career didn’t start until I was 29. And figured out what I wanted to do with my life. At which point I started in grad school here in Dallas at SMU with a major in finance. Upon graduation, I moved down to Houston, where I spent the next 10 years in M&A advisory, and oil and gas private equity. Most of that time was spent with a firm called Atomic Capital, we acquired upstream oil and gas properties. And I was the first employee to join that firm, and as a result, built out a pretty robust business development platform, which caught the eye of a classmate of mine from SMU by the name of Brooks Burgum, who’s co founder here at LongWater Opportunities.

And having stayed in touch over the post graduation period, we each knew what each other was doing, talked about whether that’d be a good fit at LongWater as they went ahead and raise their third fund just last year. At which point we decided it was and I joined the firm moved back here to Dallas and have been running business development for the firm since last October.

Patrick: And now as we get into LongWater Opportunities, Mr. Burgum from didn’t name it Burgum Capital or anything. So tell us about where you guys came up with the name?

Justin: Yeah, LongWater, LongWater was just a name, they didn’t want to sound like a traditional private equity firm. XYZ equity or capital. So they tried to go through names that were catchy on the front, but didn’t sound too private equity on the back. So LongWater had a nice ring to it. And then Opportunities was unique and that it wasn’t capital or equity or any of the traditional names you see associated with firms in our space.

Patrick: And it looks open ended. And that’s something that opportunities are what people particularly entrepreneurs are looking for. And that said in the lower middle market, let’s talk about your focus with the lower middle market. Why there because you’re on fund three, and doesn’t look like you’re scaling up. So let’s talk about your commitment down at that range.

Justin: Yeah, the lower middle market is exciting because we can work with family owned businesses, both of our co founders come from family owner operator backgrounds. And you can really scale them and grow them aggressively, more so than a traditional middle market business. Right? The typical lower middle market business is not professionalized. They’ve got a great concept, they’re selling, they have a customer base. They don’t have ERP systems, optimized factory floors, and related professionalized organizations that will help them grow.

So that’s where we come in, help them do that. Take them from the ma and pa organization to a serious middle market firm, and then exit at that point. Trying to play in the middle market where

someone already has done that, there’s a lot less low hanging fruit a lot less opportunity to expand margin and grow the business relative to coming in on that lower middle market range.

Patrick: Now, see what I really appreciate, and this is why we want to highlight LongWater Opportunities is there are so many companies out there that they they’re growing a bit, but they get to that inflection point where they’re, you know, they’re too big to be small, but they’re too small to be enterprise. And they just need that bridge over and they don’t want to cash out necessarily. But they need to get over. And sometimes if they don’t know about organizations like yours, they’re going to default to a strategic which may not have their best interests at heart, or they’re gonna go to another institution that will overcharge them and maybe under deliver in services. And so that’s why it’s so important to bring you guys all on. You mentioned a couple of the little tools that you use for this, but let’s talk about this. The types of things that LongWater Opportunities brings to the table to the lower middle market.

Justin: So, most importantly is our culture and having knowledge firsthand of family owned and operated businesses. As I mentioned, both of our co founders come from that background. We know what it takes to start from zero. Several generations ago, in one case, in the case of the Burgum family business and build a substantial business, that now you’re gonna hand over to a private equity firm. It’s a very delicate and important decision. We’ve been there, we understand how it is. And so we can help owners navigate that process. And then just the culture of our firm is very Midwestern, value oriented. So we don’t come in and rewrite the playbook.

We want to adhere to the culture of the companies we’re acquiring, come in and continue to do the things that have worked well for them. And not just be the kind of company that comes in, acts like we’re smarter than everyone, and rewrites the rulebook on how to operate. So that’s one big thing. Another thing is the experience of our investment team. They come from strong investment bank, investment banking backgrounds, as well as operational backgrounds. So we know how to professionalize and grow businesses in the lower middle market. So I think those two things, the culture and the experience we have with family owned business, and then the investment shops of our team are two key differentiators for us.

Patrick: And among the criteria you’re looking for, you’re looking for strong management teams or, you know, the management teams that want to continue on. Because, you know, share with us that great insight you had about the importance of management teams.

Justin: Management teams are great. They’re the ones who got the firm to where it, excuse me, the operating company to where it is. Why would you want to change them out? We prefer our sellers to stay on with the company and help grow and take that second bite of the apple and continue to do what they’ve done well. So that’s a key thing we look for in our acquisitions, is owners who want to stay on and help grow the business with us, take it to the next level.

Patrick: Yeah, and one of the things just to not to steal your thunder, but one of the quotes that you had when we talked before was, you know, great management teams, trump excellent business models every time. And I think that’s one of the things that will separate you from a lot of other organizations that want to say, well, we can financially re-engineer you and get you into a model that is optimized. And so I think that brings it to it. Let’s talk about your ideal target, because you’ve got a region that you really like that you’re very strong in. And you have a definitive appetite that I think is out there that the audience should know about.

Justin: Yeah, so we’re from the Midwest. One co founder, Jordan Bastable is from KC, the other Brooks Burgum is from Fargo. And, again, we have a Midwestern value set. We like the idea of investing in the Midwest. For many reasons. We’re not opposed to investing outside of the Midwest. In fact, we own companies on either coast or have. But if you think about what’s happened with the supply chain with COVID, there’s a resurgence of American manufacturing happening, and where else to go, besides where it’s been. And the bedrock for American manufacturing for the last 100 years has been in the Midwest. And we think it will return there.

We’re seeing that happen, so we’re excited to continue to invest in the Midwest and build the relationships with everyone in the M&A community to really build up a nice portfolio with Midwestern based companies.

Patrick: And then we’re talking investment sizes of?

Justin: So three to 10 million of EBITDA, call it 10 to 50 or $60 million of sales.

Patrick: Okay, okay. And one of the things that’s really helped accelerate a lot of this lower middle market M&A activity, is the insurance industry came in and brought a product to share risk or transfer risk away from the parties, which really assisted in eliminating a lot of downside in these investments. It’s called rep and warranty insurance. It’s only grown in popularity, but you know, don’t take my word for it. Justin with LongWater Opportunities, good, bad or indifferent what’s been your experience?

Justin: Well, it’s a valuable piece of the diligence puzzle, when you’re looking to close a deal. It’s something we look to secure on every deal. As I’ve mentioned to you previously, we do generally see it as somewhat of a commoditized product. Anyone can do it, but not anyone can do it well, so finding someone who you trust, who can execute and provide a reliable product to you. And during that really time sensitive, crucial due diligence period is valuable. Promising this, this versus that. We kind of view that all products is the same but again, the relationship was someone who can deliver and execute on the product in that time sensitive period is most valuable.

Patrick: Well, that’s great. And the other thing that’s come up now, particularly for lower middle market companies is rep and warranty has a bit of a blind spot. If a targeted company is under $20 million, or under even $30 million. It may not be eligible for a buy side rep and warranty policy, which is real problematic particularly for add ons. Fortunately, the industry has now come in and they have a new product, a sell side product that can ensure you know add ons or any smaller deals from a million dollars enterprise value to 30 million in enterprise value. The cost is just based on how much insurance you buy. And at 15 to $20,000 in premium per million dollars of coverage, you can buy a $5 million policy for a fraction of what the costs are.

And so it’s great to have, you know, tools like this, you know, to bring so that you can go ahead and lay fears to rest with a lot of, a lot of these lower middle market owners and founders who, you know, they want to move forward, but you know, they’re very conscious of the risk. Now, Justin, as you go forward, now we’re going, you know, shot through 2022. What do you see for M&A in 2023, either on a macro level, or with LongWater Opportunities?

Justin: So the simplest call to make, is we see valuations going down, right. There’s been a lot of powder in the market right now. And sellers are selling off peak years due to COVID supply chain issues and commodity price bumps. So valuations have been sky high, buyers are bidding off of what we would think are inflated financials. That’s all being reconciled now, as everyone looks out in front of us and sees what we think is gonna be a 12 to 18 month downturn.

So you see deals getting harder to get done. Once they’re under LOI, they fall apart, sometimes during diligence. Lenders tightening their belts a little bit. Again, valuations coming down. And a lot of bankers and intermediaries that I speak to are telling their sellers to push out for a quarter or two. But not the operation. Clean it up so you’re more presentable in what will be a recessionary market in a couple of quarters. So there’s a lot in flux right now, that all in all, it’s healthy. Because I think most buy siders will tell you it wasn’t at the market we experienced this year was not sustainable in terms of just the valuations we reached.

It’s great that the sellers were able to achieve that those exits for themselves and for their for their businesses. But a lower middle market traditionally has been a five to six times game, right? You’re paying five to six times TTM EBITDA. And we’re we’ve been offering upwards of

double that in some instances for select businesses, and still not making it to the finish line. So frothy market, it’s getting reconciled. Tough few quarters ahead of us. But when the dust settles, we think everyone should be in good shape.

Patrick: Would you consider the lower middle market a little less sensitive to the macro issues? I mean, we got these real big swings, they’re not gonna get I mean, activity off a cliff.

Justin: You know, it depends on the industry. I would say it’s more industry specific and even geography specific, as opposed to the size of the business, right. So we’re heavy, heavily invested in the building product sector. It’s sector we’ve liked and done well in. Now, that’s a sector that may get hit a little harder than say something like heavy industrial products, which is more a cyclical. Being in Texas, we’re very much a buffer to broader economic activity, because so many folks are moving here. We have, we’re energy independent, low regulation. So businesses tend to do better here than a place like, forgive me, California. So you have, it’s more acutely felt in certain geographies than others when you have this type of recession. And I would say those are the things that are going to make businesses fail or survive is what markets are selling into, and what industries they’re in.

Patrick: Fantastic. Justin Smith from LongWater Opportunities, how can our audience members find you?

Justin: Reach me at Check out our website And feel free to call me direct with our number that’s on the website with any opportunities in a lower middle market manufacturing.

Patrick: Well, fantastic. Well, it’s a pleasure speaking with you. And I also from, you know, a Silicon Valley based firm. We look at manufacturing completely different with cleanrooms and all that. It’s the manufacturers, the owners and founders that you guys serve, that really are the bedrock for the, for the foundation of the country. We really, really appreciate it. So Justin Smith from LongWater Opportunities, thanks for being here today.

Justin: Thank you, Patrick.


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