Are you a candidate for a Private Equity Group? with Drew McCuiston
Drew McCuiston is from a private equity group in Indianapolis called The Firefly group. Ed and Drew run in the same networking circles. Ed has always been impressed by Drew and his group because they’ve always done good deals. You never hear bad things about them. They’re just good guys doing good deals. And the side benefit is that one of their acquisitions is EOS or Entrepreneurial Operating System for business. They acquired the rights or the business for EOS, and it’s interesting to talk about that acquisition – why they got into it and what they plan to do with it.
Join this conversation with Drew McCuiston.
1:36 – Who is Drew McCuiston and the Firefly Group?
4:51 – What are you seeing in the M&A market now?
7:25 – Why do private equity groups want to come down the area you specialize in? How does that work?
9:29 – What makes you lose a deal?
13:31 – Do you have a deal that at that time was pretty painful to miss?
15:38 – How exactly does a private equity workgroup and what makes businesses attractive to firms like The Firefly Group?
19:41 – From your return of investment, what kind of rate versus some of the other alternative investments that are out there?
22:10 – Where did EOS come from and how?
29:25 – How much more valuable is a company that has deployed EOS versus a company that has not?
31:50 – Lifestyle or Legacy?
35:33 – What do you think is the single biggest challenge that’s facing small businesses today?
39:20 – Drew’s advice that would have the most immediate impact on business value.
41:49 – Connect with Drew McCuiston
Who is Drew McCuiston and the Firefly Group?
Drew had a bit of a random walk in his current work of principal investing. He started his career in politics and government. He used to work in the administration of former Governor Mitch Daniels. It was a great learning experience and the ability to network for a young professional to have. From there, instead of moving around every 2-4 years and working for new administration’s politicians, Drew decided to go back to business school.
It was right around the time he was settling down with his wife. He decided to go back to business school and after he finished his MBA he spent a little bit of time with healthcare doing a mix of financial work in healthcare transaction work. It is where he met one of his current partners, Derrick Smith. From there, Drew joined up with Derrick in a family office and started making some investments. They started working with their other two partners in The Firefly Group. They’ve been working together now for almost five years. A fantastic group of individuals. Drew feels like he’s the luckiest guy in the world because he got a team of partners and mentors all at once. He enjoys working with his three partners in The Firefly Group and acquiring family-owned businesses throughout the midwest and the eastern half of the united states.
Having partners like that certainly makes the work a lot easier. One of the core values at The Firefly Group is to have fun. They take their work seriously but not themselves. It’s a great joy for Drew to come to the office every day, not just to work with his partners, but to work with the leadership team members of their portfolio company and their other stakeholders, intermediary partners, and other good ones out the marketplace as they are looking for other opportunities.
What are you seeing in the M&A market now?
There is no shortage of competition in the M&A market, especially in the lower end to the middle market. The Firefly group focuses on family-owned companies and entrepreneurial companies. They’re always the first outside capital. In those sorts of situations, they don’t buy from other investment groups. The size range that they focus on is usually between $5M-$50M of revenue. The size range has seen a bit of a bifurcation of quality in terms of really attractive companies – they do attract all the attention of all the dry power groups from coast to coast – and then others that will go out to the market but simply not yet done.
But Drew and his team continue to see good economic tailwinds in the market. There is no shortage of dry power groups with a great lot of money. What they’re seeing on their end of the market is they got a lot of “larger private equity funds that are coming down” market as they say. Looking at smaller companies, not just as add on acquisitions to their platform companies, but even going below their stated minimum threshold on size coming down and looking for smaller initial acquisitions or platform acquisitions from which they can build. It’s been interesting from the competitive positioning standpoint over the last few years where you have more folks coming into the market looking to buy companies. It makes things challenging but it also keeps things interesting and keeps them on their toes and makes it a very active and vibrant market which is fun to be a part of.
Why do larger private equity groups want to come down the area you specialize in? How does that work?
For a lot of the private equity groups it’s all about deploying capital and building scale that’s why you often see that they’re willing to pay high prices for the initial acquisition with the expectation, as part of their investment, that they are to do 10, 12, 15 add on acquisitions on that single platform in order to build scale, build it quickly, and deploy capital in the process. If they had the right leadership team in place, a lot of that integration – whether cultural or systems integration – they got that process, they’ve been very skilled and well-versed at running and executing that play. It’s interesting that more of the culture shock, at least what we see in working with sellers, is from the seller side. Maybe it’s a very different buyer than what they expected while going into the process, no matter how much their advisors prepared them for.
What makes you lose a deal?
At The Firefly Group, they’re extremely selective. They don’t raise their hands too often. They don’t invest out of a traditional blind pool dedicated fund. They try to find great companies and pair them with flexible capital on a transaction-by-transaction basis. They’re really that single company functions on a stand-alone basis and partnership with The Firefly Group in our investor base. And so with that, they have a lot of flexibility. They don’t have time on where they have to appear either on the front end in terms of deploying capital, or during their investment window and how long they can stay partnered up with companies.
That has a good and bad effect on their business model. The great side is that they get to be extremely choosy. They like to work very closely with a small number of partner companies. They currently work with 5 companies. They’re not trying to build the biggest portfolio of companies. They’re not trying to have the most assets under management. They’re trying to find the right group of companies to work closely with to help build great companies. With that, The Firefly Group does not raise its hand too often. And when you don’t raise your hand too often, it doesn’t take too many bad ounces to not invest in a year. And that’s OK. But certainly on the flip side of that is they’re here to find the right opportunities to pull the trigger on, find the great teams to partner with and hopefully build a lot of value for all the stakeholders and build great cultures in those companies along the way.
They’ll miss out on some opportunities of course sometimes with a price. They may be looking at something as a platform or initial investment for them and it’s attracting a lot of strategic interest either from corporations or from larger private equity platforms. It’s a really tough situation to compete if you’re competing solely on price. They’ll lose out on opportunities simply because of bandwidth. They can only chase so many opportunities at one time. They can only prioritize. They need to be ready to run fast or let it pass by. That’s just an unfortunate reality. Sometimes when they get several different opportunities, they just have to pick one and pursue that one.
Do you have a deal that at that time was pretty painful to miss?
The Firefly Group certainly has several of those painfully missed deals. It’s less about “Man, I’m glad that one went away because it looks like it didn’t go so well,” or “I heard in the marketplace that it’s not going so well”. The ones that they’re glad that they didn’t do are the ones that freed their bandwidth to do the next ones that they got to do. If they would have been ultimately successful in chasing company XYZ then they wouldn’t have got to work with Dealers Wholesale or EOS Worldwide or Capital Lighting and their other portfolio companies. There’s some serendipity in how they end up partnering with them. Sometimes what feels like a loss is actually the opening to the opportunity to do the next one which is the right one. You just got to have a short memory. Carry the learnings and lessons with you but continue to scour for the next opportunity and the next great team to hopefully partner with.
How exactly does a private equity workgroup and what makes businesses attractive to firms like The Firefly Group?
There are 3 things that are very high-level that The Firefly Group or other private equity firms do:
- Deal origination or deal sourcing or business development. They have to find investment opportunities. This is about going out and working with business brokers, investment bankers, your trusted advisor that works to serve your private market of privately-held business company owners and being in the flow of opportunities.
- Transaction services. This is the review of those opportunities that come in the door, trying to figure out if they fit the firm’s investment criteria, are they good opportunities, do we have the right resources and relationship capital to help these opportunities. Finding due diligence, negotiation with the seller/sellers, intermediary, and interested advisors.
- Operating side. The value-creating side, working with your portfolio companies after you acquired them – that’s where most of the time is usually spent. A lot of private equity firms will have anywhere between 3-7 years of projected time horizon.
It’s on the transaction services stage where we identify which companies are the best ones for us to pursue. At the end of the day, you have to find a great leadership team and serve the right market.
From your return of investment, what kind of rate versus some of the other alternative investments that are out there?
Private equity has become such a large asset class, and the return profiles are very different. From the large multi-billion dollar funds that overtime the return profile has come down. It tends to not be a whole lot different from the public equity’s market but just a little bit different with allocation or cycle risk or beta risk. The lower end of the market is still very much return-driven. In smaller companies, you’re thinking of inherent-size risk. Just by partnering with smaller companies there’s less room for error, there’s a smaller balance sheet from which to invent even when the investment group comes in. You can expect the right to a little bit higher return profile.
For The Firefly Group, they have to underwrite a well-performing investment. They are more focused on cash-on-cash returns than they are in percentage returns. At the end of the day, they feed their families in dollars and not in percentages, and they have the flexibility on their timeline based on their model to work with companies for a long period of time over their investment window. For themselves and just their time allocation, and certainly, for their investors, they have to be return-driven, but it’s always a part of the conversation especially when the seller will be re-investing alongside them.
Where did EOS come from and how?
EOS or Entrepreneurial Operating System is the holistic set of systems and tools for business owners. It is built on from the book Traction by Gino Wickman. The Firefly Group first came to EOS as users. Drew’s partner David Mann first brought it into their group after he had read the book years and years ago. He read it and just had a Eureka moment. He realized that it was exactly what they’re trying to work on their companies in pursuit of, but it was put together in such a simple and beautiful way that makes it easier to implement. And when David shared it with the team, they all had that same “Aha!” moment. The Firefly Group were working on their operating playbook for how to help companies build value after they’re acquired, and they said EOS is the perfect system for them to use. And so, they started working with their partner companies to implement EOS in their companies because they saw it as the best tool to help get what they want in running the business while helping The Firefly Group achieve their objectives in owning the business.
Like many folks who came to EOS, they first started by reading the book, they gathered some of the tools, they worked using all of the tools, they were not getting the most out of it but they started to see some progress. As the best practice, they started working with professional and certified info meters, had them come in and work with their leadership teams on a quarterly and annual basis as part of the EOS process to help them achieve their objectives in owning the business. They saw great outcomes from it, especially in their business culture. Just the way that their team functions, they were healthier, they were holding each other accountable, they were more growth-oriented. They finally had set criteria and core values to make sure that they were hiring, promoting, and firing based on their core values.
The Firefly Group first came to EOS as rabid fans. They saw it work on their companies and they absolutely loved it. And it became their standard operating procedure to use it with all their portfolio companies long before it was ever an investment opportunity for them.
One of Drew’s partners recommended that they reach out to Gino Wickman to tell him their story. They want to let him know that they’re huge fans of the system and ask him if he wants to sell the business. A common connection introduced them to Gino several years ago. Gino was very gracious with his time in hearing their story, how much they believe in the system, how they used it with all their partner companies. Gino’s whole mantra in life is to create value and help entrepreneurs live their ideal life, and he was just glad to hear that Drew and his team are experiencing some that just by using the system he created. And when they asked if he’s ever interested in selling the business, Gino said declined. Then maybe 9 or 12 months later, Gino called one of Drew’s partners informing him that he has decided to sell the business. Drew and his team were very ecstatic. It’s not every day that as consumers, they have a very clear understanding of the product whenever new opportunities come across like that. And it was quite a process. Gino had 12 criteria of what he believed the right buyer for EOS was. 11 of them were not priced. What they liked about Gino and the entire EOS community is that Gino is very intentional about planning for the sale of his business and what is acceptable and what is unacceptable in terms of the buyer of his business. They were just very humbled to go through that process and ultimately be selected to be the partner for the next stage of growth.
How much more valuable is a company that has deployed EOS versus a company that has not?
The Firefly Group received plenty of anecdotal feedback from EOS implementers. They credit EOS not just for the value that they sold for but they even prepare them to be in the position to sell. Or that the EOS helped them realize that it’s time for them to move on and find another passion. Just that whole process, EOS is a fantastic tool for it. Drew tells business owners, sellers, bankers, anybody. At The Firefly Group, they most likely say Yes to an opportunity and they are more likely to pay more for that opportunity if they’re running on an operating system. EOS is certainly an operating system of choice and it has been long before The Firefly Group has been the owner of it. Even if you’re not running on EOS, if you have an operating system, it is a contributing factor to all the key things The Firefly Group looks for in the companies to buy. In terms of more likely a fully-developed leadership team, companies who know what their issues are can solve their issues. They can stop solving the same issue over and over again. And it frees up time for them to look ahead, look around the corners, know what’s coming and to anticipate. That sort of team and that sort of company is more broadly marketable and is more valuable in the marketplace. The Firefly Group has seen this to be true in their own experience and they hear the same from a lot of companies that are running on EOS.
Lifestyle or Legacy?
Drew said that they have seen both – business owners who keep their business for the legacy and those who do it for lifestyle. And he said neither one of those is the right answer and neither one of those is the wrong answer. When working with business owners who are working toward that eventual outcome of an exit, it’s a very emotional process. Working with good advisors, having a system like EOS, those sorts of things help the business owner prepare not just the business for the transition but also prepare themselves for the transition. For The Firefly Group, the most successful sellers know what it is they want to accomplish in exiting their business. Some would just sell to whoever pays them the most and pays them the fastest. If that is truly what they want out of their business and they’re ready for what comes next, then that’s great. Hopefully, they have good advisors to get them to that outcome. There are others that are intentional in a different sort of way. They certainly want top value for their business. Maybe they want to stay and continue to run the business or they just want to diversify the risk. Anywhere in between, but they are very intentional about what they want out of their business transition and what they care about. Sometimes that is the legacy and sometimes it’s more just a lifeline to be done.
What do you think is the single biggest challenge that’s facing small businesses today?
The war for talent is real, and it’s not going away. Talent recruitment and retention is the single biggest challenge that’s facing small businesses today. With that, companies have to be very mindful of how they, not just in approaching and recruiting talent, but how they are structured to retain that talent. Create a pathway for them to envision staying with the company long term.
There’s so much mobility in the marketplace today. From the macro-economics point of view, that’s a great thing. As a business owner and as an industry of small businesses, sometimes you wish you could place a moat around your talent. But there are no moats anymore when it comes to economic ability for talented individuals. With that, you have to invest very intentionally in culture. You have to invest in training and education for your people. You have to make your company a place that people want to come every day and feel fulfilled not just filling their bank accounts, but really enjoying where they work, who they work with, what they work on, and the opportunities that are ahead of them. That is the single biggest issue that we see and it’s across all industries.
Drew’s advice that would have the most immediate impact on business value.
The single biggest thing you can do is make yourself easily replaceable in your business. That is easier said than done for somebody who spent their life, their blood, their sweat, their tears building the business to think about building it in a way that they’re no longer needed to ensure that the business is successful. EOS and other systems like that, working with coaches and trusted advisors is a good way to help the business owners plan for that and be very intentional about it.
Just as importantly what goes along with that is that before you make yourself replaceable in your business, you have to know what you actually want to do once you’re framed to do anything. You have to be mindful and intentional about, “Okay, what’s next?” Business owners and entrepreneurs are wired a little differently. No matter how much they tell themselves they’re going to go play golf, they’re going to move to Florida, they’re too much energy there. Based on Drew and his team’s experience with business owners that they brought from and the sellers they’ve interacted in the marketplace, those who are most fulfilled and satisfied with the outcome it has very little to do with price, deals structure, and all the things we thrash around about. The fulfillment and satisfaction come with having the next passion and their next purpose and being able to harness and direct that energy in the right direction. The ones that can do that successfully are the ones that ended up making the most money out of their sales transaction.
Connect with Drew:
The best way to connect with Drew is through his LinkedIn profile.