Dan is a former private equity investor and executive who has been involved in dozens of acquisitions of small/mid-sized companies. He has the unique experience of having seen M&A from a different vantage point - as an investor, and operating partner,...
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Ronald Skelton 0:06
Hello, and welcome to the how to exit podcast where we introduce you to a world of small to medium business acquisitions and mergers. We interview business owners, industry leaders, authors, mentors and other influencers with the sole intent to share with you what it looks like to buy or sell a business. Let's get rolling.
And now a moment for our sponsors. Hello, and welcome to the how to exit Podcast. I'm Ron Skelton, your host, and today I'm here with Dan Cremons founder of accelerate partners and author of Winning Moves 105 way proven ways to create value, value in private equity backed companies. Thank you for being here today. Dan,
Dan Cremons 0:49
thank you for having me. And looking forward to this.
Ronald Skelton 0:51
Yeah, this is gonna be fun. I always love like taking stuff like you have a lot of experience in the private equity world. And a lot of our listeners are like acquisition entrepreneurs search funders in that stuff. But we buy these companies with aspirations that some day, some people are permanent hold, but most of the guys are, they're buying them to grow individually hoping to sell to a strategic partner or private equity firm. So I think there's a lot of value we can, we can have today about, you know, the book you just have out, and how private equity companies create value and look for value in companies. But let's start off kind of your origin story. How did you get into this space to help us get related to who, who Dan is?
Dan Cremons 1:34
Sure, I'll take you back to the early days only because I think it helps paint, paint the picture on how I, how I kind of ended up doing what I'm doing right now. So I am, I was born and raised in Cincinnati, Ohio in the Midwest, and Cincinnati isn't, you know, exactly the epicenter of m&a, and eta and private equity. For all I knew growing up, those were just collections of random letters, I didn't really know what PE or m&a or, you know, eta were back then. But I, you know, spent the early chapter of my career working in institutional investment research for a wealth management firm here in town. And then I kind of, you know, lucked my way into my first gig in private equity back in, I think it was 2007 or so. Which, you know, if you, if you remember the story of the 07 to 010 you know, period, it was an interesting time to land in, in that industry. But I, you know, I look my way into a job there, and really spent the last 15 or so years working in the private equity space in one way, shape, or form I've done, I've done a bunch of different things in PE, I've kind of, you know, played across the various positions in the private equity world, which just means that I'm probably not especially good at any one of them. But you know, have have just seen the same private equity movie from a few different chairs. So I've done deals before I've been on the buy side, acquiring, you know, companies like the ones that your audience are, are building. I've been on the board of private equity backed companies and supporting them and helping them to grow their businesses and working with the leadership teams of those companies. I've been a CEO and played different executive level roles and PE backed companies. And today, I spun out of a full time role within a private equity firm about a year and a half or two years ago, to start my own advisory business, really focused on the area within the private equity realm where I think I can have the most impact, which is helping the leadership teams of newly acquired companies to really answer two questions together with with their leadership team in their board. And those two questions are where are we going? Where are we trying to take this thing now that it's under new ownership? And who do we need a board to make sure we get there? So it's really about, you know, developing the vision, the strategy the, the value creation plan for a newly acquired business, and then developing what I call the people plan, which is, who are the human beings that we need around the table in order to actualize that vision, that strategy, that value creation plan. So a lot there, but that's, you know, a bit of the arc of my, my story and what's, what's led me here today?
Ronald Skelton 4:05
Okay, let's jump into the book, as you say, you say, 105 Proven Ways now, I think all of us know, increase revenue and increase recurring revenue. But what are some of the ways that would be a less obvious you know, that, you know, we can increase the value or make ourselves more appealing to the private equity companies?
Dan Cremons 4:27
Yeah, to answer that question, it may be useful if I describe some of what's in the book. So, one of the, one of the objectives of the book is to take this, this vague generic idea of value creation, which has talked a lot about and has become quite genericized in m&a land, to take this vague idea of value creation and actually break it down into its component parts, such that investors and operators and you know, acquirers like, like your audience can, can actually approach value creation a bit. More surgically. And so maybe I'll start there to say that you know at that, at the highest level, there are five basic ways you can create equity value in a private equity backed business or a business that's owned by, you know an, an investor, like those in your audience. You can grow your revenue, you can expand your margins, you can do strategic acquisitions, strategic m&a, you can pay down debt, and then you can expand your multiple, you can sell it for a higher multiple than what you bought it for. So that's it, I mean, five basic ways you can create equity value. So that construct in and of itself, isn't that useful, but it is to say, okay, if I'm if my goal, my objective, as an investor, or as an operator of small businesses to create equity value, then these, this gives me kind of five doors I can start to look behind. And given that revenue growth is, in many ways, the primary driver, at least in today's day and age of equity, value creation, and then take that a step farther and say, okay, revenue growth in and of itself is a very vague idea. So why don't we broke break that down into its component parts, and then crack each one of those parts open, and fill it with this kind of arsenal of proven actionable Winning Moves that investors and operators alike can use to actually make that revenue driver happen. So the five, six basic ways to create, create revenue are first and foremost, to keep the customers you already have keep the revenue you already have, which is customer retention. Second way is what I call Customer expansion or selling more to your existing customers. The third way is market penetration, which is to acquire new logos and your existing market. The fourth way is to expand into new markets. And new markets can be new segments, it can be new geographies, it can be new spots on the value chain. So we can, we can slice and dice market expansion and a few different ways. That's the fourth way. The fifth way is product expansion, you can create new products and services for, for your existing customers. And the sixth is price optimization, to you know price things in, in a different in, in such a way that drops more, you know, revenue to, to your bottom line. So, you know, those are the six basic ways to drive revenue. And to answer your question of, you know, how do you what are ways we can actually create value? I start by, you know, taking a step back and saying, okay, based on the business that you own, based on your vision for that business, which of the six if you want to focus on revenue for a second, which of these six revenue drivers seem to be the most juicy? You know, do you really see enough headroom in your existing market to where you can build a really big business by just staying focused on market penetration, which is the third lever, or hay is? You know, do you have this, this vast arsenal of, of products in your bag already, but you've only sold, you know, a third of them to existing customers, in which case customer expansion might be a big lever for you. So that'd be the real that's really the starting point to answer your question is, is, is looking at your business uniquely and saying of those six revenue drivers? Like which of these do I feel like are the most juicy?
Ronald Skelton 8:10
I get the, I get the overall concept of stuff? What are some examples? Like, in my head? I'm thinking okay, you know and marketing expansion? When, when my customer buys my like, there's a lot of times when your customer buys your product, if you have a widget, they buy it, what else do they need next? Right, they buy this now they need, you know, X so I don't know if top of my head, you know, you're a coffee, subscribe, you have a coffee subscription business or whatever you make, and you're, you're selling the simplest thing in the world, you're selling coffee grounds? Well, when they get one of the need, right, they need organic filters, or they need you know, they need espresso machines or, like you can enter into totally different markets and, and, and stuff but and I see that done inside of like, the software is big, right? So software is like, Okay, I sell a software license. How do I do SAS like a SAS has a higher multiple? What are some examples of things where you, you can expand inside of the same business.
Dan Cremons 9:11
There's a technique that I love that I've used as a leader myself before and I call it the before, during and after is to take your existing product or solution or service, whatever you offer today. And get first and foremost get really clear on who's actually using that thing. And then ask yourself the simple but powerful question of what is that same user doing before they engage with my product? And what are they doing right after they engage with my product? And let, let's use an example to make it more real and, and I think this is an example that we have in the book. But let's say you sell a an applicant tracking system software for small midsize companies. So you know small midsize companies are hiring There's a thing called an ATS, which, you know, once you have a bunch of resumes and helps, it's basically a workflow tool that allows you to push those applicants through the process. So let's say that's your current product today. before, during and after would say, Okay, before somebody uses an applicant, before an HR leader, and a small midsize company uses an applicant tracking system, what do they have to do in their job, that's a part of that same workflow. In this case, before I actually have applicants to track, I have to go find applicants. And that opens up a whole interesting, you know, line of thought around, well, where do applicants come from, you know, job boards and other recruiting sources. So if you kind of follow that through the, you know, through the lifecycle, you start by finding applicants enter applicant tracking system to track them through the hiring journey. And out the other side of that applicant tracking system comes a new hire. So what do I as the HR person do after the applicant tracking system, once I have a new hire? Well, there's this thing called employee onboarding, where once I, you know, hire somebody, and they show up day one, they have to figure out how do I help them to be productive and get them trained up and get them on boarded. And so this before, during and after, as an intro is just a really simple mental model that can lead you in the direction of identifying adjacent product expansion opportunities, where, hey, if I've got a core applicant tracking system, it's really valuable today, I've got an entrenched base of customers that really know and love that product, I can add more value to those customers and expand the value of those customer relationships by offering something at the front end, you know, some sort of thing that helps them to find, you know, applicants better, and offer something at the back end by moving into, you know, employee onboarding, and offering a tool or a module that helps facilitate employee onboarding. And, and oh, by the way, if that's all resident in one system, chances are my buyers are really going to like that, because they don't have to toggle between different systems to do the same thing. So there's a real business case for, for my business and just growing the value of those customer relationships. There's also a really strong business case for my customers, because it would allow them to do this all in one application. So there's a variety of, you know, a variety of things we talked about in the book around product expansion, but this is, you know, of all the, the ideas in the book, this is one of the simplest that in most intuitive that I think can really unlock some new ideas around, how can we expand our, you know, our product set?
Ronald Skelton 12:27
When you were talking about that, I thought, well, you could actually do another iteration you get those markets identified, right? And then you could take that same example and go, Okay, how do I write the best job description? And, and, and you know, you know, where do I categories, job descriptions for different roles in the company. So that can be something where you, you keep those once they're done for the different roles? And on the other side, once they're on boarded? How do I track performance to see whether or not we did a good hire? So I get feedback into the system as to what did it work? Like? Are they still there six months later, a year later, right? So I think you could actually take a second look at that. I mean, you could do what you just did, and then got it all smooth running at those markets, you know, get penetration into those markets, and sell those products, and then do it again and say, Okay, what, what do they do before this, you know, they gotta write job description, get them posted, maybe you have a posting tool or, or, you know, something that keeps the job descriptions categorized so that they can reuse them, and see how they work. And then the other end, I guess, would be the performance tracking, you know, are they still around, understanding how your customers use your product is actually, if you, if you don't, if you've never observed your customer, use your product, you could be shocked right, I had a real estate investment firm. And we had some tools that we built in house for our team. And one day that one of the team members having a hard time using it. So I just pulled up chairs outside because behind him and was watching him use the tool that I, I put together and I'm like, why are you using it that way? Right? It just like and they were using it in a way that was totally like not designed for what it was for and, you know, be honest, it was a little more efficient than what I had originally set up for it. So I just went back and changed everything to make it work with their, their natural workflow. It took me a little bit but you know, sometimes people sit down to use something and you're like we can do you're doing what was it? So there is, there is an element to really understanding how you, how your customers especially if you sell like widgets or products and stuff because a lot of times like if you think about it, a lot of products are accidentally created for another what they were created for (inaudible) industry, especially like in the medical fields, a thing that comes to my mind. A lot of medicines were researched and designed for one and one of the side effects is what they ended up selling the most for
Dan Cremons 14:42
Ronald Skelton 14:42
right. Viagra, right was a heart medicine right or something (inaudible), but they wait a second. This is a weird side effect. Wow, I can sell that. Right. So you know, I get that. What are some of the other ways so we're talking about expanding existing customers. By understanding the customer adding more value, your value add to them. What are some of the other things that drive valuation for private equity companies?
Dan Cremons 15:10
The other things that drive valuation? You know, I think this might be kind of a cheap and indirect answer. But like there, if you want to understand the, the things that drive equity value for private equity companies, good news is there's 105 of them in this book. So it's not a cheap sales pitch for the book. But it's to say that, you know, in, in the course of writing the book, deconstructed this idea of value creation in the way that I described earlier, then I went out to I, I leveraged my own experience, my own pattern recognition of the things I've gotten wrong in my career and things like that, right. And then I went out to 60, you know, 60, other private equity operators and investors, those that have built successful businesses before. And I asked them the simple question of what, what are the most equity value generative things that you've done in your companies to grow equity value, and I came away from, you know, 60, some odd conversations and, you know, 60 plus hours of call transcript with this arsenal, this vast Arsenal a lot, a lot of themes around what you can do. So I think like, you know, that's kind of point number one is, if you're interested in this topic, just check out, check out the book. And there's a lot, there's a lot in there. If I, if I were to offer a few other, you know, a few other thoughts on how to grow, use the word valuation. In the eyes of private equity buyers, there's this, you know, valuation is often denoted with, like, what am I selling it for? And what's the, you know, EBITDA I'm selling it for and what's the multiple that buyers are applying to that EBITDA So that's the basic math of how many of your audience probably know this, but the basic schema that's used to value businesses, when you go to sell private equity is what's the EBITDA or profit that I have? What's the multiple that private equity buyers are ascribing to that? So a lot of what we've discussed around, you know, revenue growth, etc, certainly impacts both of those variables. But it more directly impacts the EBITDA, you grow your revenue, you expand your margins, and that EBITDA, you know, number is gonna be, is gonna be higher. But it's also interesting, as you were kind of leading us to, to look at the multiple side of that, to say, well, you know, if I bought my business at five times, how can I create a business that I can sell for eight times, and hopefully I've grown EBITDA along the way, too, and I get the double, the double lift, there was a whole section of the book on this idea of multiple expansion, I would say a couple things just to, you know, give, give, give the audience a few things that they can kind of go with the first and this, you know, this might be an original thought here. But the best way you can expand your multiple is to build a really high quality business that buyers are going to want to buy and be lining up at the door to buy kind of obvious, that doesn't really, it's not really helpful in and of itself. But it is to say that if you're selling a business, that's a place to start your thought process of how can I expand my multiple? Well, well put yourself in the buyers shoes and say, what would, what would make this business so attractive that I would pay an E multiple for it? You know, if you bought the business originally, you at least have some pattern, you know, some kind of sense for how buyers think about a business like this, because you were the buyer. So put yourself back in that same position and say, Well, what, what would be so attractive to a buyer about this business that I could sell it for eight times? And then use the answer to that question. It kind of reverse engineer it into your, in your business. And so let's use an example for a second. Let's say you bought a business that at five times that was a I'm going to use a just an everyday example. Let's say you bought a plumbing and HVAC company, a local plumbing and HVAC company and you bought it for five times. You're trying to figure out how can I, how can I sell it for eight times whatever the numbers are. And you do this thought you do this exercise and you say, well, what would be so attractive to a buyer about it that they'd be willing to pay up and you probably lead yourself to the conclusion that hey, I'm going to have to do something different are more expensive to, to command and eat multiple than identified multiple so that leads you in the direction of saying okay, if, if I added more services around the existing customers I have that seems like something that would make it more directionally more attractive to buyers so you know, product expansion seems to be a lever that would aid my multiple if I you know, expanded my geographic market if I'm just serving this little five mile radius today but I expanded the whole metro area serve the whole metro area that seems like something that would also command a higher multiple. So whatever the list of things are, that you, you know, you, you come up with the next order of business and where the money is made is actually reverse engineering that in your business to say if I think the product expansion and growing my, growing my geographic market are really gonna move the needle from a five to an eight, then how do I do each of those things? What do I need to do? And how do I create a, you know, a strategy and a plan to make those things happen? Who do I need to? You know, what, if I'm doing plumbing an H back today, if I add an electrical, that's something that you know, selling to the same customer? And could, you know, expand your product set? And probably your multiple to? How do I go hire more techs in maybe in a different location or a different office to, to expand my geography. So point is, figure out the answer to that question, reverse engineer and your business and ask you to figure out what you need to do to actualize that and then get after it. And the multiple expansion thing will kind of take care of itself. You know, it's, it's the product of doing things in the business that are going to make it more valuable to an eventual buyer.
Ronald Skelton 20:50
Cool. Let's talk about, like, give me a i love, i love good story, what's the best? What's the best increase in value that you can think of that, you know, help the company do or you, you took x and turned it into y? And that increased the value?
Dan Cremons 21:04
Yeah, I mean, there were, there were a lot I can, there are a lot I can draw on from my, my last firm, different private equity firms, different buyers of businesses, whether your private equity or not have different strategies of how they create value. And here's the kind of the old school model of you buy a business, you lever it up, you put a bunch of debt on it, you do some financial engineering, and you hope that's going to kind of win the day. And that was true back in the day, when private equity investing was just, you know, not as populous not as competitive. The market today is very competitive, very efficient. And so firms are actually having to rely on value creation on growing these businesses to hit their target returns. And that's the whole kind of thesis of this book. And so all that to say are, you know, my last firm, our, our whole model was, was based on how do we, how do we buy high potential companies? And how do we support them in growing and making our returns through, through growth primarily. And so we have a bunch of stories. And we, you know, the average, the average returns for this firm had been remarkably strong. And so we've, you know, had a number of, of really cool growth stories. One in particular, was, you know, an early investment for this firm was in the education space. And they were a provider of continuing education, professional training to a bunch of different professions. And this, you know, when we own the business, they were, they served a single end market, they were relatively small, they were still kind of migrating from the, you know, on site model, where they were doing trainings and Holiday in conference rooms on a Saturday afternoon to the digital model. And they were somewhat of an early mover in their space, from the in person to the digital, they stood up a digital learning platform and started serving and distributing this content online. But what made this such a cool story was was two things fast forward many years, the company's still around, they're absolutely crushing it, they've been on it. We've since sold the business a number of years back, but they continue to just crush it. And what, what's made this, this story, a cool story that we can all learn from is two things. The first is they, you know, if you look across the different value creation levers we talked about in the book, they, they didn't get, get any of these right overnight, but they've nailed like, effectively, all of these they grew through acquisitions. strategic acquisition is one of the five equity value drivers I mentioned earlier. A big part of the growth story was through acquisition, they acquired other small players, it's, it's small professional education providers, and they brought them into this, you know, into, into their business. They go through acquisition. But as importantly, or more, more importantly, or powerfully, once they bought a business, they actually had an organic growth playbook that allowed them to take a company that was flagged or growing 10% A year and accelerate his growth, growth 20% They did it by drawing on some of the same levers and winning moves that are in the book of retaining their customers at a higher rate selling more products and services to them, expanding the products and services that they can offer to one specific professional type via cosmetologist or being a real estate appraiser, whoever that is. So they in a, in a really masterful way they kind of made use of each of these different levers to create organic revenue growth on top of acquisition growth. So you know, to zoom out, they just they did a really masterful job of, of drawing on a lot of the, the levers available to a business builder that are highlighted in this book to build their company. But I think even more important than, than that, and this is where this company I, I This is a less visible factor than revenue growth, but is highly contributing to revenue growth is they nailed a few of the fundamentals of business building, they were, they got really clear upfront on their culture, and culture, something that's, you know, talked about a lot. And I think for some left brain types among us, myself included, sometimes can kind of go into your one ear and out the other. And you know, it's important, but it's kind of like air where you can't really put you know, it's there, you know, it's important, but you can't really put your finger on it, and therefore, you don't really think about it that much. But they were very clear upfront on saying, Hey, before we embark on what, for us, is a 10 year journey of building this company, we have to get crystal clear right now on what is our culture? How does that manifest in core values? And how do we use those core values to guide everything we do, from the choices of the people we hired people we fire, to the things we decided to take on, they, they got really clear on that upfront and really well grounded in that. And that culture evolved over time. But culture was front and center as a really a strategy of theirs. The second thing they did an amazing job of was, they were really clear on where they were trying to go and the impact that we're trying to have in the world and call that the, the vision, which again, is one of those business buzzwords that many of us recognize is important, but maybe don't think that much about because it just feels kind of cliche, really clear on their vision. And you know, 10 years ago, when they started on this, when I say they was one of the guys, a couple of the guys who built this business are good buddies of mine. They were spent a lot of time up front saying, hey, like 10 years from now, what define success? What do we want this business to look like? 10 years from now? Why 10 years, because it's sufficiently long to where we can, we can dream big, and not feel like you know, if we're talking about a year from now, well, there's only there's certain limits as to what you can achieve in a year, but 10 years, virtually boundless and limitless what you can achieve. And so they put this very clearly stated vision on the map to help elevate the careers of a million working professionals by 20, whatever it was 2018 or whatever. And, and that vision remained, the North Star remained the constant throughout this build throughout the growth journey, it was the thing that kept pointing back to them when they were faced with the decision of do we go left? Or do we go? Right, they would ask the question of Well, which one moves us closer to or accelerates the path to serving a million per to elevate the potential of a million professionals by 2018. When they were faced with a decision of do we take on strategic initiative, a, they'd say, Well, is this the best thing to move us in the direction of, you know, serving a billion a million people by 2017. So this, you know, this vision became the constant really the rallying cry, it was highly motivational to this team, two, because they wanted to be playing a bigger game, not just you know, waking up every morning at eight o'clock, and punching out at five o'clock just kind of punching in and punching out, they wanted to actually be playing a game that was aimed at having some real impact in the world. And I think this both, both those two things that focus on culture, and the clarity of vision, wrapped around all the mechanical things they did to actualize value creation in these different ways was a really, really powerful combo.
Ronald Skelton 28:34
You know, I think that's one of the current downfalls in society is if you ask 100 people, only two or three of them can tell you where they're going, like, what is it a goal in five years or something. And, and unfortunately, having an interview, at least two other marketing agencies and probably another 100 other businesses outside of that, in the last few years for (inaudible) businesses of last few years, there's quite a few of them that if you ask them what their plan is, for three to anything longer than, you know, two years, three years, five years, you go three, five, you know, 10, almost, I would say less than a handful, probably the same, you know, two and 100 actually have a vision of where they're going to go. And there's nothing more powerful than having a clear focus intention. I just I think it's missing inside of this space. You brought up some stuff inside of there that kind of have this question that's, you know, it's kind self serving in the fact that I'm having this issue right now. But most of the acquisition entrepreneurs I knew know, we have is kind of number one rule. We're not operators. We don't want to buy ourselves another job. Right. And when we sell the private equity, we don't want to be the guy with golden handcuffs. So we were talking we're talking about in there having the right people, you know, and, and picking the right people and having people haven't aligned on a vision. How do you find that and know you've got a great operator, right that you know, somebody are, are us when I say operator, it's any (inaudible) at the C level, you can take that company and make the vision a reality. So it may be the general manager may be a CEO. But when I say operator, it's somebody at that level of their the day to day operation of the business helping you achieve where you want to get to. There is, there is absolutely an art to picking that. Do you have any insight in that?
Dan Cremons 30:21
So many thoughts on that. I mean, this is my this is, my this is this area is my jam, an area I just have a lot of, a lot of passion for and a bit of pattern recognition. And this is the million dollar question that you're posing. I say it's the million dollar question because there's this whole part of my platform and the business that I run and excellent partners, that rests on this idea that fundamentally, in these businesses, whether it's a private equity owned business, or you know, small midsize recently acquired company, fundamentally, people drive performance, people power performance. It's not products, because people create those. It's not financials that drive performance, because people are the ones doing the things that are yielding the financials, it's not KPIs, people are the ones who are actually having to do stuff to make the KPIs look green. So fundamentally, people drive performance. So if you want to apply if ,you want to apply real intensity of effort, and thoughtfulness to the variable that is most correlated with success, or lack thereof, in any one of these businesses, has to be people as the fundamental you know, unit of, I think, I think about if you think about a business, like an organism begs the question, what are the cells and the cells that have been any kind of business product, business, service, business, technology, business are people. So if you want to make the organism healthy and grow and evolve, you have to focus on the cellular level the people? So that's just a little bit of my stump speech to say, I think the, the question you're asking is totally the right. This is the many many million dollar question. So what you're, what you're posing is Why do you do that? If we accept that, as all true? Like, how do you do that? And I have a few different thoughts. I have a lot of directions, we can take this chapter, but few different thoughts. The first is first question I asked of, I do a lot of work with companies that were recently acquired to help them figure out where are we going? And who do we need a board, as I mentioned earlier, and one of the first questions I asked when they say, Well, who, who do we need them? We need more, what kind of people do we need? The first question I ask is, what's your thesis? What is your, your, your thesis, your strategy, your value creation plan, whatever you want to call it? What is the thing that defines how you're going to win? And the thought process here is start there. Start with what is the thesis? Hey, well, you know, we think over the next five years, we want to grow 20%. And we think we're going to do it by 20% a year. And we think we're going to do it through some combination of expanding into some new markets or doing some strategic acquisitions or you know, whatever the list of things are. So that is a great starting point. Because the next question is, well, how well geared is the business today, specifically, when it comes to capabilities, skills and experience to make each one of those things happen? How well geared is the business today, when it comes to capabilities, skills and experience to make each one of those things happen, you can do a little one to 10 ranking on that, hey, you know, when it comes to doing strategic acquisitions, we think we're geared at about a three because we don't never done an acquisition before. And we didn't really have anybody in the building who's, you know, has that skill set? So okay, great. Good to know. That leads that then lead you in the direction of saying, Well, who do we actually need a board, we may have some of those people already, we may have some of them, but they're not in the right role today. So we have to kind of move, you know, Sally from here to here to you know, so we may have some other people on board today. And inevitably, we realize through going through this thought process, that there are certain people who possess capabilities, skills and experience that we just don't have in the building today to make our thesis or strategy come to life. So that then leads you in the direction of answering this question of well, who do I need a board in identifying some of the gaps? So that's kind of one just a bit of a mental model that I use, you know, nearly every day working with clients to help them answer this question. There's another angle in all of this, which is, if you look at, you know, sea level roles, which was part of your prompt, like what, what are some of the attributes that you want to get right in those roles? And I would say first, first thing is kind of depends on the role. The skills I would want a CFO to have, are a bit different than the skills I would want a CEO to have, which are a bit different than skills I would need a chief sales officer to have so that's, that's probably obvious, but that's, you know, the caveat to all this. But then underneath it, there's a set of what I call attributes if you distinguish between skills and attributes, skills, classically thought of as the hard stuff the hard skills attributes classically thought of as the soft stuff, although I don't like that characterization. It works for now. So we'll go with that. I look at attributes as the soft stuff. And there, it turns out, there actually are, in my experience in my firm, my prior firms experience and in a lot of our research, there are some common attributes that tend to correlate more highly with executive success, whether executive and a big company or small company. And so at my last firm, we as we were evaluating executives to lead our companies. There were different things on each of the scorecards, depending on the situation, the thesis, all that kind of stuff, but there are three things you tend to see on most of those, those hiring scorecards, and we call them the EQ, the AQ and the GM, the EQ, being emotional intelligence, emotional quotient. There's research out there and our own anecdotal experience really lines up with this that says that EQ tends to correlate pretty strongly with, with executive effectiveness. Talk more about that in a moment, if it's useful. The AQ is adversity quotient, this is the persistence, the grit, the bust through walls factor. And why is that useful and important in you know, small midsize company? Because guess what, in any of these small midsize companies, you're gonna get knocked on your butt. You know, in some cases, speaking from experiences of cases, many times in one
Ronald Skelton 36:26
let's say sometimes it's daily, at least,
Dan Cremons 36:28
normally hourly, you know, hourly. So if you don't have high degree of adversity quotient, then it obviously poses a risk to staying in the game long enough to win, to, to drive to win. So adversity quotient we saw to be really powerful contributor to invest executive effectiveness, and overall company, you know, company performance. And then the third was growth mindset, GM growth mindset is has been talked about a lot out there. And it hails from some work done by Carol Dweck, she's written a book or two on the topic of growth mindset. But we really thought about that as kind of a learning aptitude, someone who is just gonna learn a lot faster than the other executives. And, you know, I've always kind of had this, this theory or this point of view that for any, if you want to grow 20%, as a company, your CEO, your executive team has to be growing at a rate that's greater than 20% themselves. So they're constantly staying ahead of the company's growth curve, because otherwise that their, their growth rate will regress to the mean, the company growth rate will regress to the mean, executive growth executive kind of professional personal growth rate. So you have to be growing and advancing at a rate equal to or greater than the target growth rate for the company. And so that is dependent upon having executives that just have that learning aptitude, that desire to grow and learn. And that makes them open to new perspectives, that makes them humble, it makes them aware of what are the things that actually need to learn? And how do I go do that proactively and not wait to be told to do so people that just have a natural curiosity and say, Oh, this company over here looks like they're doing this one thing really well, that's relevant to us. Let me not just put my head in that sand, but let me actually go over and get curious about what they're doing and learn from that and bring it back to my company. So these are all the sorts of things that you know, growth mindset can powerfully enable within, within an executive role in a company. So to, to wrap all that up, I mean, that the punch line of whole that is like if, you know, there's, there's a bunch of different things you can assess for in executive roles, we can have an interesting lively debate around what's most important, but I would say if you focus on those three, the EQ, the AQ, the adversity quotient, the growth mindset, in my experience, that is a, that is a recipe a formula for a really effective executive, you have to have other things, of course, you have to have some of the skills as well to complement the attributes. But those foundational attributes are really the price of admission for any of the companies that we were hiring for.
If you look at like, I don't know how to test for integrity, or other factor other than just referrals, and, and you know, trying to, you know, finding indicators of why people left certain companies and stuff like that. But these other tools, give me an insight into, you know, what somebody's their resume and their job skills will show me what they're capable of skill wise, these tools will tell me they might have been, they might excel in other areas a lot better. Have they ever been given the opportunity? So do you find that true? Some of these tools give me an insight. It's like, you know what we should try tried Nancy over here at negotiations. She has all the core skill set that it would take to be good negotiator. And she seems to like to do that in natural conversation. She plays that role of trying to make people work together. We should probably give her a little skill training inside of that. See how she does do. Do you play in that room when you're looking at like the right people in the right spot?
Yes. Yes, totally. I mean, that, that's well said. And I think that is just that what you just described is just being an intentional leader and saying, who are the human beings that are on my team? How do I build an understanding myself? Of what, what are they, you know, what are they good at? What do they have passion for? And what brings them a sense of meaning? And how can I, how can I craft their role in such a way that allows them to do things that align with those three forces. And when you do, by the way, it's good for everybody, it's good for them. Because they, you know, people want to be doing work that they're good at. They have some stretchy, you know, qualities to it, but work that plays to their fundamental strengths, want to be doing work that energizes them and want to do work that brings them a sense of meaning. And it's good for the company too, because turns out, you're gonna get a lot more out of someone who's playing it, that it that kind of intersection point. There's this whole, like, as a, as a side note, there's this book that I wrote, The first book I wrote, which was in 2020, is called the blue flame. And it's about this very topic. Of I'll give me the synopsis. And if it's interesting, we can go a layer deeper on it, but it's about effectively what you just said, which is that when, when leaders are able to help the people on their teams to get clear on three questions, first is what am I great at? The second is what most energizes me. And the third is what brings me a sense of meaning. So if I am, if I, as a leader, I'm able to help my people get clear on the answers to those questions, and then get them into a role that aligns with the intersection point of the answers to those three questions. That is the recipe for an employee, a team and a company that catches fire that lights up, hence, the blue flame imagery. And there's a lot of research in the book, there's a lot of my own experience in the book that's kind of melded into there. But the book is all about teaching leaders how to have conversations that will help them and their employees to get clear on those questions. And then what to do with the output of those conversations, which is effectively what you were describing moving people into, hey, I can move Mary over here, she's really good at and enjoys negotiation. So if I move her over here to this role that is kind of adjacent but allows her to spend more time doing that. That seems like it would make Mary happier. And it seems like it could be useful to the business allowing her to do some work that she's just going to be better at. So it's kind of common sensical. But the reality I've, I've come to learn is that a lot of leaders just aren't having those conversations and therefore are not aware of what is each of my people's answers to those three questions. And therefore they are selling themselves and their team's performance short, by not having answers to those questions, hence not having done anything with the answer to those questions and moving people around and what have you. So there's just a lot of opportunity for everybody, for leaders and their employees and their companies by extension by going back to these fundamentals of helping each person to understand uncover and actualize their blue flame in your organization.
Ronald Skelton 43:15
Dan Cremons 43:16
(inaudible) for I could talk about this topic for hour you wind me up on this man? Oh (inaudible)
Ronald Skelton 43:19
I think I think it's a valid comp topic inside of the whole conversation is that people are the key to this, right. And if we spend some time on understanding, it's something we haven't done in a lot of the shows we, we always talk about acquiring companies and reports key, you're not buying a business, you're not buying numbers and, and math or dealing with human beings and emotions. But that goes after you acquire the business to you're still doing that. And I've talked to many CEOs to look at businesses kind of like a toolbox. And Nancy is a 10 millimeter wrench, they get lost quite often the hard to keep located right? That 10 millimeter socket is the one that disappears all the time. So we're not putting Nancy anywhere else because she's the best at doing what Nancy does. And they don't even look at what Nancy is capable of. And that Nancy is not a to Miller, and really no wrenches and dadgum screwdriver, right? She's a different tool totally. Or even better. She's very versatile. She's a crescent wrench, she could be adjusted and do all kinds of stuff and the company would be the best suited to do a couple other areas. But because when they hired her and put her in there, they, they had problem X she saw problem X she's labeled as problem X solver. They don't, they're okay. They're like okay, next and I think is downfall of a lot of the a lot of companies and a lot of the acquisition entrepreneurs even is they hire a company or they buy a company and they look around like, okay, Joe does x so and so does y and that's the way it is, you know, as you just said, if you really want to set the thing on fire, figure out what people are passionate you're good at passionate about. And the third one was but uh,
Dan Cremons 44:51
sense of meaning what brings (inaudible)
Ronald Skelton 44:53
Yeah, we step back into the employee side of things. When
Dan Cremons 44:58
can I just want to do chime in there to say, I really appreciate. There's, there's a whole thread here around how can you bring this sort of intentionality, this way of thinking, ie guy, the blue flame to bear and an organization. But I also just want to tell you like, I really appreciate the intentionality with which it sounds like you're trying to live your life. You know, you mentioned your you spend time thinking about your EP guy, you're coming back to it, you've written it down and like, that is just a, you know, that's just a, an example of just living intentionally, which is something that if you, you know, you're going to be better, you know, something I tried to do, I don't always do a good job of, but I tried to just under, you know, develop a clear view of myself of like, you know, what, am I good at what energizes me and try to align my life and my energy and my time towards things that are going to allow that to manifest in the world. And, and I just, I just, I really, you and I think similarly in this area, my last firm, one of the things that we did in the first 100, maybe 180 days after we bought a company. And I, I, I I would bet you, I don't know this to be true. But I bet you, this firm was the only firm on the face of the earth that did this. In the, in the first 180 days, we go and run all of the employees and these acquired companies through this thing we call purpose and passion, which sounded a little like hokey and kind of woowoo and probably needed some rebranding or some renaming, but it was sitting down with it was having each person in the business go through this experience is basically it was a workshop, it was an experience, wherein they would get better in touch with what is my purpose, what is my passion, and, and that wasn't just for, you know, feel good, or, you know, rah, rah, Kumbaya, you know, it wasn't just for all that kind of feel good, feel good factor. But it was for two reasons. Number one, our firm really believed in and lived by this idea of people first, which is people are the fundamental drivers of our success. And so we need to invest in the people. First and foremost, invest in the company, that's kind of our day job, but we need to invest in the people so that the company can be successful. Number one, second reason why we did it is just a recognition that if we can help people to get clear on their purpose and passion, just similar to the ikigai, or similar to my blue flame construct, we can help them to live into that in their job and in their business that will make for a more successful business period. And, and I can, you know, I can sit here and tell you a case studies of where how that's come to life in these organizations. But, but I think that, that you know, the lesson and all this for folks that are out there acquiring businesses, I think there's a couple of lessons we've stumbled upon here. One is just like a recognition that people are the, the, the core of it, are the core of the success formula and a company that you're gonna buy. There's this other share this real quick is it's a quote that has stuck with me for many, many years, there was this thing that an old, an old wise mentor of mine told me probably 10 or 15 years ago, that at the time, when in one ear and out the other and I just kind of wrote off some business platitude thing. But I tell you, I come back to nearly daily now. And he said, he said, Dan, and we were with a group. So you said group a business is nothing more than people working with other people doing stuff for people. That's what a business is. We've talked about business this whole time. But that's what a business is. People working with other people, ie your employees doing stuff, making products or services for other people, ie your customers. And so when you reduce a business to its essential component parts, it becomes clear that people aren't really the elemental unit of, of measure in business. So in case we hadn't beat that point up, like I would just ring that bell one more time.
Ronald Skelton 48:52
to there's nothing more powerful than working beside somebody that loves their job. Right? You there's two different people there's energy givers people like you who love their job when you're around them and energize you. Everybody works hard around them because they you can just there's a passionate about what they do. And there's energy vampires, they hate their job, they're a poison pill to the company. And they're gonna complain about everything they do no matter what and those people should be. I don't think anybody's a bad employee. I think some people would be better employees at other companies. So those people should probably find a better employment, employment or a better spot ethic company that gives them fulfillment but uh yeah, so I
Dan Cremons 49:31
with I think that's a good distinction like the lesson in that you know, for me personally is like I want to spend my time around choose to spend my time around energy contributors not energy vampires as a leader, I, I, I you know, I have an interesting view on this. Especially the, the energy vampire part of it I for a while as a leader in so I you know, I've, I've led within small midsize car before and I drop into one of these companies. And inevitably, in any business, there's going to be an energy vampire or to or in some cases, many. And so as a earlier leader, and admittedly less mature leader, I'd go in and begin to cast, I would identify and see energy vampire in this happening, and I would cast judgment on it. What's wrong with that person? Like, why are they doing why are they showing up like that? That wasn't, you know, it's a problem, like that sort of thing. And then over time, I had this realization and a little bit of a perspective shift on this, which is, oftentimes, energy vampires are created. They're not born, but they're created through bad leadership. And and that was like, when I realized that was a little bit of a kick in the stomach moment of like, how am I? Is it conceivable that I, as a leader might be creating the very circumstances I'm trying to avoid, which is I'm creating energy vampires in some way, shape, or form, whether by my micromanaging or by my not helping people to understand their blue flame and live into that and not helping them to think through a role that can leverage their best stuff, like, can I be actually creating or contributing to the energy vampire furnace,
Ronald Skelton 51:11
Dan Cremons 51:13
enabling them? So I think like there's a while I, I think that's a useful construct, and I in certain people just fundamentally have some attitude challenges that they need to own and take accountability for. I also think it's important for leaders to look in the mirror and say, when you know, faced with an energy vampire, a cultural issue in your business, a performance issue, the first place I've learned to go as a leader is to look in the mirror and say, What am I doing or not doing as a leader that's contributing to or enabling this to happen? In some cases, like, I actually also own some, a lot of cases, the lion's share the accountability for creating, you know, whatever that is an energy vampire, or like,
Ronald Skelton 51:53
I get it. If you just acquired, it's probably not yours. But if you've had it for more than, you know, a few months, and it still persist, it's probably your issue. And, and, and I do that in a lot of things. We're talking about self perspective, and how we read it regularly yourself, I find, I, I dive back into myself if I'm upset at more than three people within a single day. Like how am I presenting myself that this has occurred more than once or twice today? You know, it's, I'm human, I'm, I'm subject to bad moods and other stuff. Is it me? You know, it's cause and effect I want, you know, am I the cause, right? Do I need to own responsibility for how the day's going? And, you know, now I need to own responsibility that we're at over an hour here. So I'm loving this conversation, man, you're brilliant. I, I enjoy doing this. But we, we probably do need to wrap it up. Let's, let's, let's do the, let's just kind of finish up what's if, if you can leave us people on the listening are gonna listen to this in the future. With one maybe two takeaways. After everything you said what was the most important thing that they could take a walk away with?
Dan Cremons 52:57
Maybe some recency bias given this is the most recent topic we've been talking about. But the, the one thing I would leave you with is just to remember that fundamentally, if you're after performance in your business, fundamentally, it is people that drive performance, it's not products, people create those, it's not financial results, people are doing the things that generate the financial results. Fundamentally, people are the ones that drive performance. So if you as a business owner, as a leader, as an acquirer want to apply real intensity of effort at the variable that has the greatest likelihood of positively impacting your investment results or you return to your growth, focus on the people. And hopefully, there's a few things that came out of this conversation, the blue flame, the ikigai, the idea of, you know, helping people get into a role that aligns with their best stuff, a few more tactical ideas from this conversation that can help you to to get the people in your organization lit up. I don't say one. One other thing I could have just a really punctuate the point you just made private equity buyers nowadays, if, if you go back to the earlier topic of conversation of how do you build a business, it's going to maximize your exit potential to, to a private equity buyer, private equity buyers in today's day and age, if really woken up to the importance of people to investment returns. And so when they're in there doing due diligence on or evaluating an acquisition target, they are absolutely focused on is this, is this a team and a culture and, you know, collection of executives and skills within those executives is this, is this have all the fundamental attributes of a high performing team that we can put a lot of confidence in and therefore convince ourselves that this is a business willing to you know, we'd be willing to bid up for so I, I think you're right to point out that you know, just buyers are buyers are really paying attention to this nowadays and it will impact your valuation
Ronald Skelton 55:00
Awesome, awesome. How do people get a hold of you, if they, if they liked what they heard today, and they want to work with you a little bit. They're running a private equity firm or whatever. And you know, your target customer is, and they want to reach out to you what's the best way for them to
Dan Cremons 55:13
Best way to do that is via LinkedIn, connect with me, I try to post stuff that hopefully is, you know, remotely valuable to folks that are in the private equity business, whether it's an investor or operator. And I love just trading ideas with and trying to be helpful to others in that community. So link up with me on LinkedIn. It's best way to get me.
Ronald Skelton 55:32
Awesome. And I appreciate you being here today. Is there any, any last thoughts you want to add?
Dan Cremons 55:37
No, thank you for having me. This has been a really fun and rich conversation. I've learned a handful of things from, from you. And from this discussion that I'm taking away. So thank you.
Ronald Skelton 55:46
Dan Cremons 55:46
Ronald Skelton 55:46
Well, you guys out there listening to you. There's a hotline on here. If you want me to make these shows longer, let me know I've had two feedback so far that I cut people off Wait, you're an hour is not long enough. We're getting into the good meat of things. Problem is I scheduled it for that. So it's kind of hard to say, hey, let's just keep going when people have other stuff on their calendar stuff. But if you're one of the people that think that we should just let the conversations go, as long as the, the guest is willing, I'll spread things out. And we'll try that a couple of times. So reach out to my hotline, email me, give me some feedback as to whether or not you want these episodes to go longer. And I appreciate you, Dan, and we'll call that a show.
Dan Cremons 56:24
Ron. Thanks, man. Appreciate it.
Ronald Skelton 56:26
Hey, it's your host, Ronald Skelton. I want to thank you personally for watching the show today and invite you to call our new hotline 918-641-4150 That's 918-641-4150 Call us and tell us about our show, ask questions, suggested guests or even tell me about a business you have for sale and we'll reach back out to you. Again that number is 918-641-4150. call our hotline leave us some information. Thank you. I don't want to announce our new channel partners the ITX marketplace since 1998 ITX has created 5 billion in value by selling more than 225 it businesses and 20 countries. IDX works exclusively with it enabled businesses generating between 5 million and 30 million who are ready to be sold in m&a to decision makers who are ready to buy for over 25 years ITX has developed industry knowledge that helps determine whether a seller is a good fit for their buyers before making the match ITX mergers and acquisition marketplace we have partnered with has a proprietary database of 50,000 plus global buyers seeking it service firms managed service providers, Microsoft service providers software as a service platforms and channel partners with Microsoft Oracle ServiceNow itself and the Salesforce space. If you have an IT enabled business you're ready to sell. I want you to visit the I T exchange net.com/marketplace How to exit that link will be in the show notes visit them now. The investors and entrepreneurs professional mastermind. The investors and entrepreneurs professional mastermind combines that additional peer to peer mastermind introduced first in Napoleon Hills famous book Thinking grow rich with accountability partnering where your peers help you ensure that you set goals take action and get results. If you want to scale blow past roadblocks and achieve success faster than you might think is possible. I suggest you take a visit over to tiepm.com That's T i e. P m.com. And check out the investors and entrepreneurs professional mastermind