Partner For Growth – How Private Equity Can Increase Your Cash With Jesse Gee
Ep. 65: How Private Equity Can Increase Your Cash
D you want to increase your cash? Look for private equity partners. Ryan Englin & Jeremy Macliver welcome Jesse Gee, the Manager at G-K Industries. Jesse talks about how private equity partners give you access to capital. Plus, they bring a level of sophistication that drives your business to create better results. To make good partnerships, you need to have solid people and processes. If you want to learn more about how private equity can increase your cash, you may want to listen to this episode. Tune in!
Partner For Growth – How Private Equity Can Increase Your Cash With Jesse Gee
It’s not every day that we get to have a guest like on this episode’s guests. He has been in the financial space for a long time but before that, he was in the home improvement industry. He gets what it takes to grow a business that has people out in the field and is dealing with a lot of the challenges that you’re dealing with.
After he moved into financials, he grew a great-sized business, sold it to a private equity fund and that’s what he does. He talks and educates entrepreneurs on how you leverage the finances that are out there so that you can take your business to the next level, stand out and make a difference. I want to welcome our guest Jesse Gee to the show. Thanks for being here, Jesse.
Thank you. I’m glad to be here.
We talked a little bit about your passion and drive for entrepreneurs and helping them think differently about their business. One of the questions I love to ask is, what is the biggest myth as it relates to your industry that you see when it comes to entrepreneurs?
As I think about being an entrepreneur, which I’ve been one since I was eighteen years old, what I’ve come to know and understand over that time is that you don’t need to come up with a brilliant idea. At least in my own experience, it’s not the great idea that matters most in the businesses that I’ve been involved with. They weren’t new industries or markets. They were ones that have been around for a long time.
What we were able to do in most cases is do a little bit better of a job on executing in and around the business itself, the fulfillment of those businesses but also around innovating and being creative about how we went to market, sales, marketing and thinking about that. The biggest myth is that you’ve got to have this great idea, which in my experience is not the case.
There’s a couple of things that you said right there out the gate that pique my interest versus you’ve been an entrepreneur since eighteen. I love that because a lot of the entrepreneurs that I work with have their story starts then. Some of them you dig back and might be the same. You start recognizing your entrepreneurial eye and drive early on in your childhood.
The one thing that I see that I’m looking forward that you have overcome is sometimes we get over-confident in that. We sold lollipops at twelve years old, had a route, did this and overcame a lot of things to be an entrepreneur. At eighteen, you’re an entrepreneur. At nineteen, I made my first hire. For a long time, I felt like I had the answers. I know self-sufficient but you also shared that there was a spot where you got clear about how you were executing a little bit better. I’d like to dig into that. What was that thing that started giving you that competitive little bit better advantage?Necessity is the mother of all invention. Click To Tweet
As I think back, one of the many things I’m very grateful for is I had some good mentors as a young man and I could learn. I wasn’t coming from a college degree or any of that. It was that old saying, “Necessity’s the mother of all invention.” For me, to transition from trading my time for money or being an employee in that way to being an entrepreneur, a lot of what I needed to know was what people around me were doing and doing well. That was the beginning of it.
We’re all very fortunate to live in a world where information is free. As I matured, got further into the business, had done more things and as the internet came along, that became a powerful tool because I could get pretty smart on about anything as long as I was willing to go and do a little bit of work to get it. I would point to those couple of things as being big drivers.
I know some of your financial background and some of those amazing feats that you’ve done in business by the numbers. Could you share a couple of those clips with us before I tee up the next question, which will be, how did you leverage so much growth? How did you take from doing it yourself to being able to grow exponentially like that? Before you do that, I would like to hear some of those stats that you’ve shared with us.
When we went to talk about being eighteen, I was out doing kitchen table sales and home improvements. I view that as entrepreneurial. If you don’t go make any sales, you don’t make any money. That was my first foray into that but in terms of being a business owner, we got into the mortgage industry in 1999. Mortgages have been around for a long time. It’s highly competitive, somewhat commoditized and largely price-driven.
We saw an opportunity where we could leverage our backend infrastructure. We’re good at processing these loans. In that business, you’re manufacturing a file that you can get approved, funded and closed. We started with one employee but we went from half a dozen employees to 1,000 across 42 licensed offices for five years and that was all organic. What we did with one of our assets was the fulfillment and backup process.
We focused on hiring. We made hiring and training one of the most important things that we were doing. We were always hiring. We built systems and processes around that so that we could hire ten people a day, for example, and in many cases, we did. We did a lot of things right but focusing on that and understanding that it was business about people and processes helped us to scale it up. By quite a bit of stroke of luck in 2005 before the great recession, it was to follow, we were able to exit the business. That was my first experience in building and having a successful exit.
You shared that 42 offices and 1,000 licensees. A lot of accelerated growth with that tagging onto your very first comments that you’ve made. You began looking at the business, trading time for money and those kinds of things. Help us to understand, is that growth began to happen? You’re focusing on hiring the people. There’s some cash basis behind us that has started helping you to accelerate. Can you explain the money side of it for us?
In that business, the barriers to entry were pretty low and it continues to be fairly low. We self-funded ourselves and started the business with not a lot. When I say, “We,” I’m referring to my wife and me. We’re the last people to get paid. We reinvested but we also had an eye on working capital and thinking about how a business creates new customers? How the money comes in and goes out? At the end of the day, you hope there’s some left. You build a model, so there’s some left.
One of the things that helped us to be self-funding and we’ve applied this to other businesses are thinking about that working capital and trying to manage that in such a way, whether that’s pushing payables out, some accelerating receivables in if you’re working with financing sources, figuring out, “Can we get paid a little bit earlier to help support our growth?” We were fortunate in as much as we were able to engineer that in such a way that it was largely self-financed.
It got down to managing your finances strategically, not as the customer and the market was dictating, getting more methodical with the way you’re doing that.
You get so consumed with the business of business because there are always emergencies and things always seem urgent. Being thoughtful and thinking about it makes an impact on the overall liquidity of the business. To your earlier point, if you’re growing by leaps and bounds, a lot of times, you start running into issues where you run out of capital because your pipeline is getting bigger and the capital to support the resources to execute on that becomes thinner. Even more so if you’re in a situation where you’re growing, you’ve got to head up on that and how that’s going to flow through your model.
I know that you invest in businesses through your funds and you’ve built several yourself. This isn’t theory to you. You built the mortgage one we’ve talked about. You’ve got the energy company that you built successfully exited. When you began looking at it from the numbers and investments, what are the 1 or 2 biggest pitfalls you see businesses getting into or traps that we would say? You’re like, “That’s not going to make a good investment.” Not from your perspective but even from their perspective.
I could speak to what I look for. What we do is we look for entrepreneurial businesses where we think that we can add value, whether that’s capital. There’s usually a capital component to that and then add some strategic value from bringing our experiences to bear. The thing that I look for is a couple of things. Number one, the most important thing to me is the operator.
There’s no substitute for having a good operator or CEO, whatever title you want to give them but the person that the buck stops with. We think about. We partner with people. They don’t have to have all the answers, nor do I but they got to be somebody that shows up every day that you can trust and checks those boxes.
The other thing that I have found works for us is we look for businesses that I’ll call boring and are easy to understand. A lot of trades are not overly complicated businesses. We look for opportunities where you may have a competitive industry, plumbing, roofing or one of these types of businesses where we think we can either execute better and innovate around how we go to market. Bring a little bit more sophistication and thought into how the business is run and how to grow it. We’ve found that largely to work. It’s pretty simple. It’s not a silver bullet, but that’s what’s worked for us.
One of the two biggest things that you’re looking for in a business is the leader, how much ability they have and all that stuff. Do you know want to do the second one for me, Jesse?Look for businesses that are easy to understand. Click To Tweet
The second thing is looking for businesses that are easy to understand. I call them boring businesses, not in a negative way but in a positive way. Whether it’s executed better, innovate a little bit, in and around sales marketing and drive that top of the sales to funnel with customers, we find to be the most important things.
With that in mind, the leadership, their dependability and how simple a business is to understand. I love that you use the word boring. I love boring companies because you’re right. They can beat the market. People can understand it. From and what I’m hearing, you’re looking for that 1% or 5% better. It’s not that they have to be completely transformational but we can create a market edge. That’s where you’ve won every single one of these times.
I was going to give an example. We entered the roofing business in February of 2021. We started at zeros, a pure startup and continue to have a great operator. There are lots of roofing businesses. It’s very competitive but what was interesting about the strategy was is we focused on a particular marketing and sales approach in building a channel around that. More specifically, we focused on catering to solar companies because what we realized was solar companies about 10% up to 20% of all their customers need a new roof.
What we found was that you’d have the CEO of ABC Solar pulling their hair out because they got 20 different subcontractors across 10 different markets. It was hard to keep track. If the roof fails, you’ve got a real problem with your solar system. It’s a super important part of the project if it’s needed. We focused on being a great partner to solar companies and that is our one thing, our mission. We think of them as one of our customers in addition to the customer that’s on the roof of their house.
We went from zero and broke $1 million in sales within the first six months. We expect by the end of 2021 to break $2 million in sales with a healthy margin. As an example, I had a great operator but took a business that was boring but easy to understand and found a different way to go to market, a different way to develop a channel and that has made all the difference.
I love how niche you got to the solar. That leaves room for another roofing company to dominate still and win in the market, but niche somewhere else and you’re perfectly okay with that.
At the end of the day, whoever delivers the most value wins and that’s the way that it should be but there’s such a broad market. In that industry, there is plenty of room for competition. It’s how you innovate a little bit. It doesn’t have to be transformational. Sometimes it’d be increments of change, increments of how you think about going to market and serving the customer, that can make a huge difference in your business.
Let’s dive a little bit deeper into what you do because we’ve been focusing on the entrepreneur’s side of it. You go in and get to see a lot of different businesses and how they operate. Do they have a special, unique, competitive advantage in the marketplace? You’re looking at it from a financial, “Let’s do this. Let’s not do this.” Why would the entrepreneur consider a financial partner like you?
I came from a world before ever having a financial partner where I thought, “Why would I do that? I don’t need any partners. I didn’t need the money. What was the point?” After though, I went through not a full exit but brought on a private equity partner in one of our businesses, they brought value in relationships. There’s a capital component to that but they made us as a management team step up and professionalize us.
Before, if you’re the owner, CEO, founder and chairman of the board, you don’t have anyone to report to and maybe that’s the way you want it, which I get. Bringing in a financial partner gave us access to the capital but it also brought us a different level of sophistication. As I look back on it, it helped us drive more business and was the catalyst for value improvement.
I was not expecting that answer from you but I’ve thought of several different clients that I’ve seen humming along and doing good. We’re working with them. They’re becoming more professional and clear. They realize their strategy of growth and there may be some cashflow. Not limitations because they could adjust their growth. They have control over their numbers but they see more opportunities out there that they can take advantage of.
I’ve seen several of them leap a financial partner, private equity, independent sponsor and any of those kinds of scenarios. Interestingly, what you highlighted is the big value that they get. That’s been the biggest one I’ve seen too. They become ten times better operators because they have this accountability and clarity. They began to become more independent from their business, which was their dream in the very beginning. They began to run that business versus in the business.
I want to be a CEO, board member, solo extraordinaire and all those other fun things. I also wanted independence. Sometimes when I’m all of that, I’m not getting the independence. I’ve seen that one. I love the contacts. Being able to leverage not only the money but the relationships to grow and take something to the next level.
A common term in the private equity world is they want to invest in a platform. In layman’s terms, a business where you’ve got a solid foundation of people and processes, then you can bolt on other businesses and/or grow organically. That’s a third thing that I didn’t mention that I would mention. Having access to that capital and helping build that sophisticated business platform takes you from acquiring one customer at a time to potentially through acquisitions in other channels. Maybe you start to grow somewhat exponentially. That’s another big value driver.
Help us through this. Entrepreneurs reading that had been considering it sees a bigger vision than they’re able to achieve. They’re excited to bring in some professional support, help thinking and professional money into the game. What are some of the criteria that they should consider? There’s a lot of different financial partners out there. What should they be considering that would be important on their side?
I would answer that question by first commenting. In the world of private equity investors, you have financial and strategic investors. The first question that you want to ask yourself is, “What’s the right partner for me? If I’m in a plumbing business, is the right partner a national plumbing parts distributor that could be strategic and help me to grow my business through their network?” On the financial side, that largely comes down to you having an investor that they’re trying to achieve some type of ROI. There is their hurdle and your business checks those boxes. You start there.If your goal is to grow, find a strategic investor that can help support you. Click To Tweet
The other question you’d ask yourself is, “Am I going to be staying in business or am I cashing a check-in and I’m out?” If it’s the latter, then you may be looking for a financial investor but you could also be looking for a strategic. If your goal is to grow, trying to find a strategic investor that can help support you and bring to bear some of the things that some of their resources are probably a good way to go.
The third thing I would say and I learned this not the hard way but I did appreciate it, is when you start to go down that path and earn it, having a good investment banker in your corner is hugely valuable. Not only because you’re busy running your business and these things take a lot of time and energy but they help you to maximize your value and open up the broadest universe of potential investors.
You would recommend if they were in there to go talk to an investment banker?
I would. It’s well worth the dollars that you’re going to pay them.
They go get an investment banker. This is going to help them get clear on their goals. I agree with you. If this is a retirement exit, it’s financial. The shows are digging into, “I want to grow. I have a bigger dream and vision. I’m looking for somebody to help me along on that.” You shared your story that you did bring in and some of the values you got. With that, they need to get clear on where they’re going. What do they want? Is it a financial exit? Is it strategic growth? Once they have that strategic growth, are there any questions that they should be asking? Do you think that the investment is going to be able to bring out the clarity they need?
Having the right investment banker, they’ll be able to help you curate a lot of the questions but as a business owner, you put your heart and soul into these businesses. You build teams with people. It was a lot of care that went into it. I would not be shy. I would ask the tough questions like, “What’s life look like when you’re my partner? What do you expect? Is this going to be something where you’re calling me every morning at 6:00 AM to get an update or are we going to meet once a quarter for a board meeting?” You should be clear about the questions of how you add value to my business.
The money is nice if you’re taking some money out of business but beyond that, how do you help me grow, find customers and identify acquisition opportunities? Do that early on. Especially entrepreneurs, they have a pretty good sense for people. When you get in the room, spend a couple of hours with potential investors and ask the question, you’ll start to get a feel as it’s going to be a good partnership. To your point, you must get it right because getting it wrong is painful.
I love that you said to dig in and get real. Don’t be afraid of any question, conversation or concern that you have while you’re going through this because when you get to the other side, if you haven’t covered those, they’re going to come up.
As we’re talking, a couple of things that come to mind is asking the question, how many other plumbing companies have you acquired? Can I talk to their CEOs? Have you been involved with any lawsuits with your partners? Getting down to those nitty-gritty questions helps find the right partner.
If I’m an entrepreneur, I’m considering, and I don’t know if now’s the time, when’s the time? When should I start talking to someone about investing or exploring this? Where am I at my business when it’s the right time?
If you’re thinking about bringing on a partner, you should start prepping for that probably a year, if not even a little more, before you intend to do a transaction. That’s going to help you to get your ducks in order, so to speak. Whether it’s a strategic partner or a financial partner, they’re all going to want to see largely the same stuff.
They’re going to want to see you got good financial records. It’s most likely going to be focused around EBITDA and multiples of that in terms of valuation. The first thing I would say is to start early. In terms of talking to an investment maker, you start with that discussion early too, and they can help you to build to a point where you’re ready.
In terms of some of the other metrics, it’s tough to say. There’s a universe of investors out there and some of them say, “If it’s not a $100 million transaction, we won’t even consider it.” You go down to the more middle-market type of transactions. I look to invest anywhere from a few hundred thousand dollars to a few million dollars and see, “Can we make an impact and add a lot of value?”
I don’t know that there’s a necessarily particular scale that you need to be at because you have those options. I would say more so, making sure that you’ve got good records and you’ve built a business that looks like a platform business that you could add another 100 or 1,000 customers a month and you’ve got the right processes to support that.
The last comment I would make about that is if you’re on a scale where you can have a CFO or a strong controller, somebody that has a good handle on your books and finances, that’s a huge addition to that whole process. If you don’t have that, start thinking about, “What are the pieces of the puzzle I need to put in place?” If you don’t have them, maybe a year and a half before you intend to get a transaction done. Once you get into an offer, it could be as soon as 90 days, which in my experience, it’s never 90 days. It’s usually 6 to 7 months before you get a transaction done.
We realize that we don’t have a CFO. We’re at that size where it’s not quite making sense. We got good books or keeping clean stuff. What’s your view of an outside CFO?Think of your exit strategy. Click To Tweet
I have a few people in my network that do that and help support businesses. When they’re ready to have a full-time CFO, they can but if you have a good bookkeeper that has good records, that’s a great idea. You can have somebody that can think a little bit more strategically, look at the business a little bit differently, be a good sounding board for you, and you don’t have to take on the heavy burden that comes along with that role.
I was growing some collision centers and we’re doubling every single year, high growth kind of thing. I brought in an outsourced CFO, somebody that was way more educated and skilled than I could afford but I didn’t need 40 to 60 hours of that a week. I needed a smaller portion of it. I got immense value. I looked at my business completely different. I began understanding why I would even consider these valuations, EBITDA and those things.
I started realizing, “This is an entity that’s building wealth. It does a service. It needs to also be growing by the numbers and value of this organization.” As I say, “No one could see my hands. My hands make an entity outside of me.” When I started my business, it was all around me. I was in it. That outsource CFO was the breaking point for me, where it became something else, its living mechanism.
We’ve looked at partnering and thought about this. We’re having this and you said a long time out. We’re talking a year and a half out. Don’t go too fast is what you’re saying. Get clear on what you want but then we make this leap. We have this conversation, get the right investment banker and make the deal. Tell us what to expect on the other side of that. The deal is done. What should we be expecting or thinking about? It could be different in our life post-financial partner that maybe we haven’t discussed yet.
You’re going to have probably a lot more in the way of financial reporting that you may have now as the sole owner. That’s an expectation that we should have. Depending on who your partner is, it could be very high touch and maybe that’s good or that’s what you want and/or need. It might be weekly but we’ve had relationships where it was largely driven by the CEO. He’s like, “I want to have a weekly update call where we’re focusing on the key metrics of the business.” We’ve gone as much as every week, having we call a flash call to quarterly board meetings and everything in between.
That’s some of the stuff that you have flushed out early on but certainly, what you can expect is higher quality reporting and a little bit more strategic thought. One of the things I didn’t mention with your question of what are some of the things you should be looking for is that I want to bring up an important question, “What’s the exit strategy?” Everybody knows how to get into these partnerships. You sign a bunch of paperwork, and there’s some exchange of value, but then it’s like, “Where does this go? Are we building something that we’re going to try to sell for more in a few years or is this a longer-term hold?” I wanted to add that.
I thought of it when you were talking at one point and didn’t bring it up because when you’re even asking about questioning, the other plumbers that they may have bought, ask them how long they have held their businesses? What is their success rate? What’s their growth rate because they’re going to have a track record on that?
Make sure it aligns with your core. Jesse, we have been having a time on this. I’ve been enjoying the conversation. As we bring this to a wrap, to somebody that’s reading who doesn’t know if they’re interested or not, what’s 1 or 2 things that they should maybe do to help them get that ball going yes or no direction? What would that be?
A part of your question was when’s the right time and I was a little bit broadened in my answer. I said, “With the scale of your business, there are certain limitations to that but the scale might not be as important as some other things.” I do think one of the things that every investor is going to want to see is that you’re going through a period of growth. You have a real strategy about how you’re going to continue to do that. Stepping back to that question, it’s a good time to be in the process of evaluating partners when you’re going through a period of growth and the more, the better. It tends to give you more leverage in the negotiations.
In terms of getting started, looking at your business, if you don’t already have the business laid out from beginning to end, what are the KPIs that drive the business? Is it the number of new leads that are coming in or the number of conversions? Getting clear around your financial picture, making sure that if there are add-backs, a lot of entrepreneurial business, you might have a vehicle and some other things running through there, which either internal, external CFO could help you to get that down.
Start tracking it. If you do not already have at least a monthly get-together with the people in your organization that handle the books and evaluating, what are the KPIs? What’s our P&L? What’s our balance sheet? What are those metrics? Them bringing some focus to those things will create better results, interestingly enough. My advice is a good place to start.
Jesse, I have enjoyed this. Thank you so much for being our guest on the show. If anyone was interested in this going down the path and said, “I would like to talk to somebody,” who should they reach out to? Where should they go first? Give them a name, number and direction.
I have a website and it’s largely been about putting information out there that has been useful to me. We keep it pretty current, try to put information out that entrepreneurs can use and do that. That’s at JesseGee.com. As soon as you come on the site and in anticipation of the show, we will put an offer up there. Give us your number. We’re not going to sell it. We’ll use it to call you. Be happy to spend some time with you on the phone. If nothing else, maybe we can impart some advice that’s useful or maybe there is some type of opportunity to partner in the business. Go to the site, fill that out or browse around and that would be a good next step.
Thank you so much. For everybody out there reading, if you’re on the fence and you want to explore a little bit more, Jesse has made a valuable offer. Go to this website, look around and possibly even have a conversation with them. Thank you so much for being our guest, Jesse. I look forward to our next conversation.
It’s been my pleasure. Thanks so much.
About Jesse Gee
Jesse Gee’s background as an entrepreneur spans nearly two decades. From humble beginnings Jesse has leveraged his skills as a leader and innovator to develop and build several businesses.
Jesse got his start as an entrepreneur when, at the age of 21, he acquired the finance business that he was working for. He then led the company from a brokerage operation with 9 employees to a vertically integrated banking and insurance business employing over 1000 people with branches in a dozen states.
Love the show? Subscribe, rate, review, and share! https://bluecollarculture.com/podcast/