Heritage Holding’s Alex de Pfyffer & Ross Porter – EP.239

Hood & Strong LLP – One of the nation’s premier full-service public accounting firms, Hood & Strong LLP provides buy- and sell-side quality of earnings, due diligence, assurance and tax services to search funds, private equity firms, and business owners and investors. The H&S Advisory team helps expedite a smooth, cost-effective transaction process that maximizes value and minimizes tax impacts for both buyers and sellers. To learn more about how Hood & Strong can support your M&A objectives, please contact Transaction Advisory Group Partner Jerry Zhou at [email protected].

Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.

If you are under LOI, please reach out to August to learn more about how Oberle can help with insurance due diligence at oberle-risk.com. Or reach out to August directly at [email protected].

Interested in sponsoring?

(00:00:00) – Intro

(00:02:54) – Recapping Heritage Holding’s last few years of growth

(00:08:00) – What drove the decision to sell off platforms?

(00:11:42) – How did initial platform acquisitions inform your criteria for future acquisitions?

(00:18:08) – Fragmented PE interest

(00:24:59) – Building out the Heritage team

(00:31:52) – Organizing the leadership team around integrating new acquisitions

(00:40:15) – Developing Sales teams

(00:44:20) – Raising a Fund

(00:48:03) – Setting a fast pace for activity and execution

Alex Bridgeman: I’m glad we get to do another episode because the Heritage story, like it came out a few years ago when our first episode came out was still very new and there’s a lot that has happened since then, lots of different theses that you’ve explored, and a bunch of folks that either I know or have gotten to know have joined your team in different ways, and that’s really exciting to hear all about. Would you be able to recap maybe the last couple years of Heritage and some of the work and theses you’ve explored and roles that you’ve created in the company? 

Alex de Pfyffer: Yeah, sure. Last time we spoke was at the end of 2022. And it does feel like yesterday, but it also feels like a lot has been accomplished since. I think we had just gotten into our fiber platform that year. And since we spoke, we grew that platform fairly substantially. We did another five add-on acquisitions to create some scale and to increase our footprints, our thesis being focusing on rural markets where we’re the first fiber mover. So we entered Oregon since, Colorado since, and we now are building in 12 plus markets with exactly that thesis of competing with more imperfect slower internet technologies. So primarily wireless or DSL. It’s been good to see that the projects that have been completed so far are proving out in terms of what we call the take rate, which is essentially the adoption rate of your technology. So we’ve got two markets in which we’ve complete construction. One is Priest River, Idaho, in which we’ve now signed up about 15% of the 980 passings that we’ve built in a matter of three months. So that’s been pretty cool to see. Platteville, Colorado, is a similar market in terms of the competition where we’ve actually built 888 passings, and there we’ve signed up about 300 subscribers in six, seven months. So it does feel like we are- if we build fiber in those markets with little competition, folks will sign up, which is fantastic to see. And I’m not going to go too far in the weeds in terms of the rest of the platforms, but I’ll say that since then, we’ve also acquired an MSP platform, which initially the platform was called Complete Network. And we’ve done three add-on, four add-on acquisitions actually as of last week, since to create a business that now has a nationwide footprint in terms of our ITMSP services but also has some pretty cutting-edge services and products that it can offer in terms of analytics and AI database management, but also cybersecurity. So those two platforms have been kind of the bulk of the operational focus at Heritage. We’ve also doubled our team size in the last couple of years with the goal of putting together a more committed pool of capital, which will be deployed for the next five platforms. So since we spoke, we’ve spent a lot of time thinking about how to increase the team, what the next 10 years at Heritage would look like. And that’s how we settled on this idea of let’s put together some committed capital with our existing investors and some new, more institutional folks to increase the pace of our acquisition process. And we’ll go into that if it’s interesting, Alex, as well, because we are convinced that our segment of the market has a couple of decades for us to be buying businesses from baby boomers who want to retire, and we want to be that retirement solution for baby boomers in industries that we like, in industries that fit our profile. So, I think two platforms operations has been a key focus, building the team and getting that fund vehicle in place for the next five years has been a core focus. Ross, I’ll let you add to whatever I missed here. 

Ross Porter: No, it’s spot on. Yeah, we came out of 2021 where we sold three of our platforms. So we didn’t have that much day-to-day running on the platform side. And we also since sold another platform. So I think we talked a lot about the IT asset disposition business in our last podcast. We recently sold that business to a public company, Celestica, which was exciting to see and go through that process as well. So yeah, we’ve really focused on building out Heritage a lot more than early on in our years. I think in the beginning, we were focused a lot more on platform by platform and now we’ve been a little more conscious about building a great team at Heritage Holding to really focus on sourcing opportunities, what’s the best way to get in front of business owners in large volumes and then that follow on acquisition integration and operational role. So we have four people on our team right now that step into that role of being Jack of all trades, kind of COO, head of integration, doing a lot of follow on M&A work where we see a ton of value being added to these platforms as we gain scale. 

Alex Bridgeman: What drove the decision to sell off those platforms, including the disposition business? Is it just kind of right place, right time, or right price, or is there something long-term that made you hesitant to believe you could continue building something like that? 

Ross Porter: It’s a great question. It’s always a huge debate between myself and Alex and the whole team here. It’s painful to sell these companies because it takes so long to understand the industry, to kind of build out the team, understand what is driving value at the company. And it probably takes a couple of years before humming in an industry that we buy a company in. So, it is painful to kind of go from really in depth in an industry and a team and kind of firing on all cylinders to selling the business and going into a new platform. So there usually is like a good reason for it. The first three platforms we sold back in 2021, a little bit of it was just trying to get a win on the board. Alex and myself, it was nice to get some liquidity, kind of prove out to investors that, hey, this is working, we’re adding value to these companies. And we set off in 2021 to sell one business. And I think valuations were really high and the market was really hot. And we ended up selling three of the companies that we went to market with, and that was good. And then we sold NCS company. Again, we got a great valuation. We really thought it was a great fit for the business itself. It was a large public company that wanted to build out their services division. That’s really what we could offer with NCS is leading their kind of services. It was a company that manufactures a lot of servers and networking equipment that needed help with services and aftermarket type work on it, which NCS did really well. 

Alex de Pfyffer: And to clarify 2021 a little bit more, we actually hired an investment bank to do a process for just one of the platforms. We received unsolicited offers for the other two platforms and the offers seemed real, seemed very attractive, and we felt like it was the right thing to do given how hot the market got and the fact that it was becoming more difficult to find well-priced bolt-on acquisitions, especially in data center services. So it felt like we should capitalize on the heat of the market and take those good offers while they were out there. With regards to our ITAD business, as Ross said, it was definitely a tough one. This is a market that has enormous growth ahead when we think about the amount of e-waste in the world that we’re producing on a daily basis, when we think about the level of sophistication of North America versus Europe when it comes to triaging and processing e-waste and decommissioning IT assets, the US has a lot to catch up on with Europe, and it’s heading that way with regards to the standards that are being rolled out and the focus that large Fortune 500 companies are giving to how they are decommissioning and recycling the IT assets. So, there’s a ton of growth there, and letting go of NCS was definitely a difficult choice, but it felt like the right next chapter for the company given Celestica, the buyer’s expertise in customizing and manufacturing servers and the strategic vision of using our X firm as the service arm made a lot of sense to us and creates a very strong competitive position in the market overall. 

Alex Bridgeman: How would you say those initial platforms adjusted what you look for in any new platform or new industry for a new platform? If you took kind of your criteria for an industry today versus when you launched, what are some of the differences one person might notice reading through the two versions? 

Ross Porter: I think the most obvious difference is I think we’re a little bit more industry conscious when we go into opportunity. I think early on, we were a little more opportunistic of, hey, this is a great business, good characteristics for this one single business, but maybe the industry isn’t that huge or maybe it’s hard to find follow on acquisitions and integrate things. I think we were able to do it and we got lucky a few times in some of those platforms to do more follow on acquisitions. Now, we’re definitely a lot more conscious about finding an industry that we can do a lot of follow on acquisitions. I think Alex and myself are big believers that scale in these businesses really helps out. It helps attract talent to the platforms. It helps diversify away from maybe a key person risk or a customer concentration in the business. So, I think one of the trickiest parts about buying small businesses is that they’re small. They’re fragile, either from the employee people side or maybe the customer side. And the best way to get away from that fragility is adding scale to the business. And I think the fastest way you can do that is to do really good follow-on acquisitions that make a lot of sense and can integrate well into the platform. So that’s what we focused on a lot more now is making sure that the platform or the industry is large enough to support maybe 10 to 20 more acquisitions onto this platform. And the nature of the business itself will lend itself to integrate businesses together, where there are some economies of scale and synergies between multiple acquisitions. 

Alex de Pfyffer: Yeah, very well said, Ross. I think the other big difference that you would notice, Alex, is that we’ve become a lot more systematic around selecting industries. So at any given moment, we’ll have 15, quote unquote, hot industries that we’ll be sourcing in, and we’ll be trading industries in and out of that group on a bimonthly basis based on whether the thesis is continuing to be true based on whether we are finding good deal flow in those industries. So I think the process we have around selecting an industry is a lot more improved and is a lot more systematic as I said earlier. And I think we look at a number of factors. I think the first one is revenue dynamic. That’s a key one. We try to understand how resilient revenue is in those companies. We focus on B2B service companies primarily and we like companies that provide a service that is resilient, that is mission critical. So, the first filter we’ll run when we’re looking at a new industry is how did this industry do in ’08, ’09? How did it do during COVID? And if we find that revenue was stable, was solid or grew during those periods, that’s a check mark. That becomes a mission critical or essential service industry that we get really excited about. The second piece of it is fragmentation. Because we’re very M&A focused as Ross mentioned, we like industries that have tens of thousands of targets. So, we actually used to own a clinical trials company that was a side operator running trials for pharmaceutical firms and CROs. That industry had a couple of thousand targets. So it was not small by any means, a couple of thousand independent targets. But when we started, we were one of a handful of consolidators, and by the time we sold the business, it attracted more private equity interest, which lended itself to paying higher multiples. And so that space became crowded quickly because it was smaller than 10,000 companies. So, we like to look at fragmentation in the context of P interest. An industry that we’re super excited about right now and which will likely be our next platform is HVAC. So HVAC has 20 plus consolidators in the space, but depending on who you ask, HVAC has between 30,000 and 100,000 targets. That is an enormous market which has space for a lot of consolidators. So in the context of HVAC specifically, we like that there are so many consolidators because it gives us plenty of exit options. Last but not least, when we look at new industries, we want to make sure that we truly understand the business model and what the business does. We need to be able to, as non-experts in that field, simply explain what the company actually does. If it’s a data center, we’re storing data for our clients or providing rack space in secure, redundant environments for our customers. If it’s non-destructive testing, it’s a field service organization that goes out and tests equipment, machinery, pipelines to preemptively detect any flaws. So, it’s a field service preventative maintenance business. It is important to us that we truly understand the business. So I talked about the revenue resiliency/revenue dynamic of a business, the fragmentation of an industry, and understanding the business model of businesses within that industry as important check marks for us to complete before going into a specific industry. 

Alex Bridgeman: One thing you kind of touched on there that I think is really interesting too is the fragmentation in PE interest. Like having some PE interest in activity is a good sign because you have exit opportunities, but not having so much that it’s a crowded space where there’s not as much to do. I’ve thought about that with like data businesses, which there’s one or two like consistent buyers that I know of, but it’s not anything close to what software might be, for example. It’s like it’s not always a good sign if there’s no one out there doing what you’re thinking of doing, but having a few is helpful. Like, where do you find that balance of like it’s good that there’s some interest, but not so much that there’s not as much for us to work on? 

Ross Porter: Yeah, I think it’s a ratio between how many targets are out there and how many consolidators there are. I think even still, though, I guess given some data behind that, the clinical trial sites, we found there was less than a thousand. So, there was less than a thousand. I think by the time we exited, there’s maybe five to ten consolidators going on. So you just find that all of them are breached out to those same companies. And it’s really tough to find a good opportunity that hasn’t been really bid up or auctioned here. HVAC, I think we’re still excited about because the larger numbers on the amount of fragmentation there is… So 50,000 targets, and even still, if there’s 20 aggregators out there, we still find good opportunities. I think the second part that we still love is we’re willing to go smaller and maybe messier with these companies. We’re willing to start at less than a million dollars of EBITDA, maybe five, ten employees, where maybe a lot of these bigger private equity firms or kind of more financial buyers are scared off. Like they don’t want to go into the depths of the company and help with operations or hiring or building out a team or implementing software, where I think that’s really our bread and butter. We love companies that have a great business, but maybe it’s a little bit messy or really centered around a single founder that a lot of information’s in their head. And we love doing that hard work to bring that kind of company, and bring in software, helping in the back office, helping put systems in to be able to scale a business like that. And so, I still think that even in an industry that there’s a lot of aggregators, we still find a large segment of the market where some of these companies haven’t been reached out to and talked with a bunch of buyers all the time. 

Alex de Pfyffer: Yeah, I think it goes back to the size of the US market in general and the societal problem that we’re having where we’ve got a market in which there’s a million plus small businesses in the US with half of those businesses being owned by folks who are 55 years or older and there needs to be a transition of those businesses at some point. And so that does give you a very large addressable market for what we’re doing. We try and separate ourselves from a more traditional private equity buyer by going smaller, as Ross mentioned, but also by being a lot more focused on working with founders, founders who have spent decades building their companies, founders who have grown these companies to a size in which they’re living very comfortably and they’ve got a- but they’re also wearing a lot of the hats. A lot of the founders we partner with are the CEO, the CRO, the CFO, sometimes the chief janitor. They are wearing a lot of different hats and participating in many functions, much more than you would see at larger businesses. And so our value proposition is to come in and help take over some of these functions on an interim basis. So a lot of the founders we work with dislike the same functions. And dislike might be a strong word, but most business owners we’ve partnered with are not big fans of the accounting and financial management piece of the business. They would much rather focus on the technical aspects or the customer management of the operations because that’s what drives them, that’s what fulfills them. And I’m very happy to let go of some of those functions that sometimes might seem more tedious. Other items that we often take on at Heritage Holding include marketing. We are big on building and scaling sales teams that are software enabled and where we can launch a CRM to track things appropriately and to increase our ROI on sales efforts. HR and hiring is another big one that we take on at Heritage Holding. And so we’re coming in to these founder relationships in these industries that we like as solution providers instead of selling something. We’re not approaching a founder and saying we absolutely want to buy your business and this is why. We’re approaching it with the viewpoint of partnership. And our message is, hey, we recognize that you are important to the business, you’re a key person in this business, and we want to support you in the path to transitioning some of the responsibilities along the way. And so we’re going to be your partner as we accomplish taking on some of your responsibilities so that you either have more time to focus on the things that you enjoy in the business, building relationships, building our world share with existing customers or finding elegant solutions to technical problems, depending on the person, depending on the industry, that varies a lot. So it’s either you spend more time on the things you love doing within the business, or you spend more time with your family that you haven’t spent much time with in the last 20 years. We’re fully supportive of that. And so we do not have a set requirement of the length of time that a seller needs to stay with us, but we would prefer years, not months, because we do want to make sure that the transition goes smoothly. And we’re also open to sellers staying along with us and building the business for the long run with us. So I think that approach to working with founders is very important for us. I think it’s a much more, I would say, collegial and partner-oriented discussion which we have, which we approach with also a lot of humility and respect. We are not telling business owners how to run companies and industries that they’ve been in for decades. We are coming in with some humility to understand how the business works, why certain processes are in place before we suggest implementing any changes. So I do think that a focus on working with small business owners who are founders and who are looking for a path out of being that key person is important, Alex. 

Alex Bridgeman: You talked about spending a lot of time building out the Heritage team as well. And I’m just kind of personally curious how a team, how you would go about building a team to pursue multiple theses like this as a firm. I just find that to be an interesting area to dive into. Can you talk about just how the Heritage team is organized and constructed and sort of key roles throughout Heritage and how they all link together? 

Alex de Pfyffer: Sure. I’ll start off, and you can edit and complete anything I’ve missed. We are very focused on two types of roles at Heritage. And it starts with sourcing and going out to business owners directly. I think that’s a key role, kind of the social role joining at Heritage Holding, which focuses on identifying the right opportunities in the industries that we like, these industries that are on the hot list that I mentioned. We have four people who are now full-time sourcing and looking at different opportunities. They’re each looking at three to four industries, and we like talent that has an understanding of small business. I think that’s important, and you’ll find that most of our team has come from a small business background either in their prior employment or career before Heritage Holding or in their family context. We do think that folks who have that understanding of how things work in a small business are going to connect a lot better with the business owners that we talk to because they can relate to that world a lot better. So a couple of members from our team have grown up in small business. One of our team members grew up as his family was building a gas distribution business out in the Northwest. We have another team member whose family comes from a franchising of hotel brands business and he kind of grew up helping and working in the business. And we really like that understanding of small business for team members who are starting out. As these sourcing team members begin to get traction on the deals that they find and we get closer to closing, they will get exposure on a more, they will get a more complete perspective of the M&A process, the diligence piece, the legal and accounting piece. And then ultimately, once the deal is closed, some oversight, some exposure to operations. So that is kind of the starting role in which you can start in Heritage Holding. And that role graduates progressively into a chief integrator role. That role is very critical to what we do, and this is somebody who can come into a new platform and make quick decisions based on limited information, who has a high degree of intelligence and is a problem solver, who is able to keep track of payroll in a field service organization, but can also work with accounting to roll out a new ERP system, or can decide what kind of sales people we need to hire for said organization. So I think it takes a high level of IQ, but very importantly, a high level of EQ. We value team members that are able to be in a room with whoever and is able to relate to folks in that room. Whether you’re working with someone from accounting or whether you’re in the boardroom presenting to board members and investors, we need people who have that range. And that’s what we feel like we’ve done a great job building and nurturing our team of chief integrators that we hope to grow over the coming years. 

Ross Porter: I think what’s noticeably absent from that list is like deal folks. We haven’t hired private equity, investment banking types that you might expect in a firm like ours. I think we find that’s just not a relevant skill set for what we’re trying to do. What we’re doing is it looks a lot more like building businesses, sourcing businesses, getting deep into the integrations of businesses, and somebody who comes in just looking to negotiate legal docs or get intense with the diligence, it isn’t super helpful. These aren’t super complicated deals. We’re trying to find partnerships with business owners that we want to treat fairly during the deal process and get across the finish line, but most of the heavy lift is finding those deals up front and then doing the integration operational work thereafter. And I think we find, especially on that integrator role, it’s somebody that’s really emotionally intelligent, can handle all sorts of different personalities, different people within the business, and then is deep in the execution and operational kind of skill sets where they can get in and really solve any challenge, whether it’s sales or hiring or software implementation. It’s a lot more critical for us than finding private equity deal guys that just want to kind of get deals done. 

Alex de Pfyffer: We’re very big believers in the concept of overestimating people, and that started by necessity. We started with limited resources, we had to grow our team, so we hired folks right out of college and gave them fairly big roles and a lot of responsibilities early. And we’ve now seen several of these team members thrive and grow over the last few years with us and accomplishing those roles and responsibilities super well. So that’s become part of our culture, that you can take on a lot of responsibilities quickly if you work hard with us and if you do a good job. And I think that also means that we don’t require two years of investment banking and two years of private equity before joining us or an MBA for that matter. We believe that folks can learn young what we’re doing. And actually we prefer that we’re able to teach our way to folks rather than have to change around some habits that come from, that are attached to coming from the larger private equity world. And Alex, on the chief integrators, I’m happy to go into other details there if that’s helpful. 

Alex Bridgeman: Yeah, absolutely. That’s just kind of an interesting role that I am curious how that person would interact with the sourcing team, or maybe it’s the same person for a while until there’s a large enough platform. I’m not really sure how that gets organized. But just like how do you organize the Heritage leadership team around integrating new acquisitions, just what that looks like and when that person gets involved and the types of initial like first 30, 90 day focuses for that person? 

Alex de Pfyffer: Yeah, we like to involve those team members pretty early on in the deal process. So sometimes as early as the initial meetings. But the goal, the initial goal of our chief integrators is to build good working relationships with business owners whose companies will be buying. So as early as possible is usually better. Those chief integrators will be involved in the diligence process, reviewing information and negotiating and relaying with the seller to make sure that we get the right deal through the due diligence process. And then we’ll put together the first 90 day plan and be critical to implement that first 90 day plan. And once that first 90 day plan is executed, that chief integrator continues to manage that seller relationship while focusing on future integrations or ongoing integrations of other companies is the way I would describe it. So in the context of the HVAC companies that we’re acquiring over the next few weeks here, our chief integrator has been managing relationships with multiple sellers, so lots of time spent together, lots of trust being built, but also developing the tactical plan, the post-closing tactical plan. 

Ross Porter: Yeah, I’d say that post-closing tactical plan isn’t too complicated, especially getting into a new platform. We’re not trying to change these businesses substantially, especially in the first six months to a year. Our goal is really to partner with great businesses that are working really well, that have great employees, that don’t need a ton of change. So usually what we’re trying to figure out is where we can help these owners and add value. So, it’s spending a lot of time with the owners of the businesses, understanding what they really love in the business, what they would be happy to stop doing. And usually it’s planning around that. So, figuring out what we can, at Heritage, can help support these businesses to go to. And usually that’s around sales process. So a lot of business owners maybe love the existing relationships they have with clients but really hate knocking on doors and opening up new logos with new companies out there. And that’s something we’re happy to take on and deliver for the company. Usually they hate the kind of HR part of it, so the hiring and firing and training and all that side of the business. And that’s something that we can help scale up across all of our platforms. So we have a lot of that in-house resources that we provide. And then really the chief integrator’s there to really know the company deep. So every single employee, what their skillset is, if there’s a new opportunity that comes to a platform where we might have five or six companies, that person knows exactly which company is best suited for it, maybe several companies that can tag team to help figure it out. And it’s a tough role. There’s a lot of personalities, there’s a lot of leadership across the board of these platforms. So it’s somebody that can really understand each person, each founder of each business and work alongside them. And then Alex and myself play that role a lot. So we have the most experience now of dealing with small businesses and acquisitions. So we get really deep into these platforms to figure out what we need to add to the platform as well. And usually most of that’s in that chief integrator role as well, where we’re getting into the businesses, figuring out what needs to get done, setting up those initiatives, and either the two of us take those on or we work with the Heritage team to take on those initiatives. I’d say most of it though is probably six months and beyond once we have an acquisition, once we fully understand who the team is, meet all the employees, know where the strengths and some of the weaknesses lie in each of the companies, and see where we can support them. 

Alex de Pfyffer: And that’s one of the most fun parts of our jobs. We get to learn from founders who have spent decades building their businesses and each have their own secret sauce and special way of seeing the world. And we are able to learn that secret sauce from them and understand what makes their company special. And then we get to recommend and implement strategic changes or initiatives that will make us grow faster and be more efficient organizations and hopefully one day become leaders in our industries. That is a very cool thing that we get to spend a lot of time with business owners that we get to learn from and who we get to partner with to build a faster growing company is the goal there. So, we’re getting a lot of enjoyment out of it. 

Ross Porter: That’s definitely the most fun part of the job for me. I can’t stress that enough of the privilege it is to spend time with business owners. Like that first interaction of spending an hour or two with a business owner and learning how they started the business and why and all the evolutions they’ve had along the way and the risky times that they’ve doubled down on their business time and time again. It’s amazing. I think the most amazing part in this country is people can be successful in so many different ways. They can take a very analytical approach to their business. They can take a really leadership approach to their business and take different risk tolerances. We’ll partner with business owners that are really risk averse and just grown slowly over the years. We’ve partnered with business owners that have bet their company a few times. And it’s amazing. It’s quite amazing. I think our favorite one is Paul Maury, our first partner that we partnered with. He graduated high school, was a union electrician in Boston, and he was starting to kind of work nights and weekends on the side of his union job. And he was doing well with that but doing it all himself. Then he gets hit by a car one day, he’s like 20 years old, has a bunch of work on the side that he still needs to accomplish. So he gets a couple of his buddies to start doing that work on the side and realizes he has a knack for managing these projects much more than doing it himself out there. So, over the course of the next 30 years, he builds a $50 million electrical contracting business, probably halfway in there, he teams up with Comcast to do a lot of telecom maintenance work, which just expands his business a ton. And it’s amazing. Like, no MBA, no formal education, but it’s the most amazing kind of high integrity and best decision maker we’ve partnered with, with a bunch of our partners. I can’t say, everyone’s a little bit different. So, there’s going to be business partners we partner with now that might be hurt by those comments, but everyone’s special in their own way. And it’s amazing to see all the different business owners we have and how they kind of come to their- grow such a cool and awesome business when they partner with us. And it’s a privilege to us to be able to learn from them of what makes them successful. And hopefully we can learn some of those traits as well. 

Alex de Pfyffer: And in an ideal world, they learn to feel a similar way about us in terms of getting something out of working with us. We only want to work with folks who we can help and we can support with some of the functions I mentioned earlier in the podcast, but also we want to carry our own weight. We certainly want to make sure that we’re taking on roles, adding new clients, adding new tools to the business that are going to make everyone’s day easier. It’s important that we do our part. And so, it is truly a partnership. 

Alex Bridgeman: I would love to also just dive into, you’re clearly operations focused, but making sure that the momentum the founders had continues. Can you talk about some of the key value creation levers that you focus on and feel like are your bread and butter? You’ve mentioned sales and add-on acquisition. Sales is very close to my heart. I love studying sales orgs, so I’d love to hear about that. But what do you view as your key go-to plays that work the best in your experience so far? 

Alex de Pfyffer: So, I’ll talk a little bit about the levers we pull across our platforms. To answer your question, Alex, I do really think it starts with M&A. We need to do add-on acquisitions to get to a certain scale. To get to a certain scale that justifies hiring full-time management positions for some of the functions that we are holding on an interim basis. Our job is to build platforms for middle market large cap private equity. So we do need to make sure that we build a depth of management in these companies that goes beyond the founder. We are highly focused on having the core functions in the business by the time we go out and sell them. So M&A is a means to an end for us. It helps us get to that scale. Secondly, as you mentioned, we go deep in operations. Going deep in operations can mean not doing anything if we’ve understood that the business actually has very well established and efficient processes. One example of that is that company NCS Global that we talked about that we sold earlier this year. That company was just hyper-efficient. It had the right toolkit, the right accounting processes, the right customer reporting processes. And so, the quality of the systems was good, and so the initial changes we recommended were very minimal. But understanding how the organization is set up. What are the critical systems and tools for those organizations is the first part of the job, and then we make recommendations. I think some of the quick wins come around having one shot of accounts for the whole organization on the accounting side. How is payroll being done? Are we still doing paycheck cards, or can we roll out an app where people can track their hours? Looking at the systems base and figuring out what tools we’ve used previously that have helped our companies improve is a big piece of it. Then on the growth side, as you mentioned, Alex, it is very much about investing in sales and marketing. We take a very growth focus. We have a big growth focus in the organizations that we come in, which means that we’ll devote a ton of budget to try things out in sales, whether that’s implementing new tools or new types of advertising or hiring a sales team fast, we’ve done all the above. I think the key part is making sure that we track the sales KPIs that matter, also the operational ones, but we do have a high-risk appetite on the sales side, I’ll say. And then once we feel that we’ve got the right scale, we can bring on the right management, the technology stack is in a good spot and organic growth is happening, we tend to step out of operations a little bit and let the management team focus more on it and not step on their toes but become their supporters and their partners. So it is kind of that, there is that life cycle in which we acquire a new platform in a new industry, it’s all hands on deck, many people from the Heritage team will have a role or a function at the company, then we do acquisitions, we integrate, we get to a certain scale, we track the right level of management, and then it becomes more in the management’s hands to run the day-to-day, if that makes sense. 

Alex Bridgeman: Yeah, certainly. You’ve also raised a larger fund to go after multiple platforms. Can you just talk about the rationale behind the fund or the model behind it and then a little bit of what does that allow you to do? It seems like it allows you to do more, perhaps faster. What capabilities do you have as a result of that fund that were missing or less so before? 

Alex de Pfyffer: Sure. So, in our history, we’ve acquired seven platforms, seven separate industries, and our average number of acquisitions per platform has been around four. And we felt that we could have gone faster had we had the team we have in place today, had the systems and processes around M&A and integration that we have today, and had we had that capital be more committed. Fundraising is something I lead at Heritage Holding and is an important part of my job which I enjoy tremendously. But when you’re under LOI and you’re new to an industry or you’re doing bolt-ons and you’re trying to make sense of data from different systems that might be imperfect and you’re communicating with your lender about increasing your loan size and you’re also raising the equity, it does take a little bit more time to get the deal done. And so we feel that the industries that we’re going in have the room for us to do 10 plus acquisitions. So we are putting together this pool of committed capital for our next five platforms, which will all be in the same vehicle. And instead of doing three to four acquisitions per platform, we want to do ten or more. And we think that being able to deploy faster will lead to us being much faster than we have been historically. So, it is a very exciting time that we’ll be closing on this vehicle in a couple of weeks here. 

Ross Porter: I think we’re also thinking through the Heritage team. I think with the fund, it just gives a more obvious progression of doing more deals and what their ownership in a fund like this would look like. So I think it allows us to hire more people and have a kind of more continuous vehicle for them to be a part of over the long haul. So we started 10 years ago or so just doing a self-funded search. It was just Alex and myself. We slowly built out the team somewhat from proceeds from these companies or management fees, but a lot out of our pocket that we’ve had to put in here. And it’s hard to hire people when we don’t have that much of a track record and that much kind of committed capital to prove out that we can keep them on board for several years. We had a lot of enterprising kind of entrepreneurial folks join our team early on, which we’re really thankful for. And now, it helps us a little bit here because we have some committed capital to help pay some of those Heritage salaries and also give them a path towards ownership in the fund and hopefully lucrative results should all this go well. 

Alex de Pfyffer: It gives a much clearer objective. We’ve got five years, we’re going to deploy X, we’re buying five platforms, we’re doing 50 acquisitions, and you’re a part of it. In fact, you’re going to be instrumental to getting to this objective. As opposed to Ross and Alex buying and selling a few platforms here and there and being a bit more- it might be perceived as slightly more haphazard than this very clear goal that we have. 

Alex Bridgeman: You mentioned it also allows you to go faster. I’m curious how you internally and at companies set a fast pace of activity and execution. Where does that come from and how do you implement that consistently? 

Ross Porter: I think it’s a big part of our competitive advantage and our culture that we try to set, Alex and I are both pretty stringent about replying to emails within a couple hours here and not letting things go by. I think that’s the culture we try to set of just being really responsive and quick to decisions. I think that’s an advantage of us being a relatively smaller firm, a smaller company, very entrepreneurial. I think a part of our competitive advantage is we can get there, understand things quicker and make decisions quicker. And that’s really what we try to push. We want to make sure that we’re not wasting our time, we’re not wasting business owners’ time for deals that might not happen. We try to make sure we come to clear, quick decisions and go forward with it. And I think in the space that we’re in, there’s not a ton of decisions that are that critical, that are going to make and break things. I think the most critical thing is to move at speed. If you take too long to make some of these decisions, you just won’t be able to do enough things in the day. And I think that really comes from the entrepreneurial beginnings of Alex and myself. It’s just been ourselves, it’s been how much time we have in the day to get things done. And a big thing that we think through all the time is like, what’s the return on our time, like collectively at Heritage holding. There’s kind of return on capital that obviously is measured and really important to us, but in order to deliver that, we have to think through like what’s the most value adding things we can do to each platform or to Heritage overall with how many hours in the day we have. And that starts from our upbringing. Like we’ve had- once we get into these companies, we’ll have hundreds of initiatives that we’ll want to get done in these businesses and really just not enough time in the day to do everything. And I think that’s a great thing to have and we just have to be selective of what’s most important and how do we do that as quickly and efficiently as possible. But it is time consuming. Every time we’ve done a deal, I think we’ve done about 25 deals in our history, and every time it’s going back to investors, and maybe we’ll have a little bit of committed capital from them, at least recently in the last couple of vehicles, we’ve been raising more of committed capital across one single portfolio or one single platform, but most of the time, it’s going back to 30 or 40 investors and giving them information about the deal and raising money. And it’s a long time process. Alex has spent a lot of time talking to investors and raising funds for all the deals historically. And it’s nice to be able to just do that one time for one large fund and then have that capital for the next five years to go deploy.

Alex de Pfyffer: And you asked about going faster, Alex. I also think that our culture is super important in terms of our ability to process more and more decisions and transactions and operational initiatives. We definitely have a get it done attitude on our team. We have team members who are very excited about the objectives that we’re chasing. We have a tremendous amount of fun working together. There’s a great team spirit. And everyone is very clear on what they’re adding to the team and how they can help. And everyone acts that way. It’s just phenomenal to see a team member like Matt Glass, who we hired out of college as a sourcing expert, helping us identify opportunities who is now under LOI with six companies, and he’s managing those different deal processes and interviewing general managers and potential integrators, and seeing the development from Matt, who joined us four years ago, to where he’s at today is very rewarding and I think is a good example of us overestimating people and the culture we’re building. I think that allows us to go faster because Matt will ping me on a Sunday night saying, hey, we need to send the LOI by tomorrow. Are you good with it? Ross has signed off on it. An example like that shows you that kind of urgency to get things done and the familiarity we have with each other as a team. 

Alex Bridgeman: Yeah, I have a personal urgency as well. So, I enjoy hearing about how others kind of set that internally. So, it’s neat to hear that you’ve been able to do that well. But thank you both for coming on the podcast again. This was really fun. I love getting to hear about how different folks are exploring especially consolidation theses and multiple at the same time and the team behind that. So thank you both for sharing. It’s been a lot of fun. 

Alex de Pfyffer: Thanks, Alex. I’m grateful for your time and we appreciate your gift of microphones. I think hopefully it leads to more clarity on this one. Happy to talk to you again, and call us anytime to do chapter three. 

Ross Porter: Thanks, Alex, I really appreciate it. We love the space and love talking about it, so love what you’re doing with the podcast.