Little Engine Ventures: A Different Kind of Private Equity for Small Business
Today, Ed had an opportunity with Mikel Berger. Mikel is one of the co-founders of a private equity group, but they are not your average private equity group. He has 37 partners and they are buying small businesses. He and his team are looking for deals with business owners that are looking to retire. It’s a really interesting group doing special things in this underserved market.
Enjoy this episode with Mikel Berger!
1:25 – Who is Mikel Berger?
4:45 – Little Engine Ventures
7:30 – How the LEV model works and why it works?
10:30 – What do those 37 investment partners do?
12:10 – How did a variety of businesses get on board LEV?
17:03 – We’re early adapters and formulators of new combinations
22:52 – What makes a deal an automatic No?
27:36 – What is your best acquisition and what made it great?
30:55 – What do you see as the greatest challenge that’s facing business owners?
33:05 – As you look at these deals, are you looking at the end in mind?
35:50 – If I have a company and we agreed on price terms and conditions, what does the last 30 or 60 days before the deal is done and then the first 30 or 60 days after the deal is done look like?
40:45 – Mikel’s advice that would have the most immediate impact on business value
43:32 – Are business owners that are selling prepared for sale?
46:51 – Connect with Mikel Berger
Who is Mikel Berger?
Mikel Berger is the founding partner of Little Engine Ventures – a partnership of business owners buying small businesses from retiring business owners in Central Indiana. Little Engine Ventures (LEV) has completed 12 acquisitions in 3 years. Mikel is also the co-founder of a software development firm DelMar Software Development and a co-working studio MatchBOX Coworking Studio.
Mikel describes himself as a reluctant entrepreneur or an accidental business owner. Coming out of Purdue University with a software development degree. This was right after the dotcom bubblehead burst 15-16 years ago. There weren’t any jobs that he thought interesting or a good fit. The professor that he worked with, Kyle Luke, is one of those few folks in Purdue who get 10 years without a Ph.D. Mikel and Kyle were talking about how software should be written and decided to just do it that way. So, they started a little company called DelMar Software Development so that they’ll get paid making software for people. They grew the company over time by writing software the way they thought it should be written. He built a company just because that’s what he wanted to do in a place where he wanted to work.
Somewhere along the way, about 5 to 6 years ago, with the help of a few other folks, Mikel started a non-profit coworking space in Lafayette because it was the place he wished had existed when they were 30 down mark before they could afford their real office. Back then he would have said he wished for a conference room and a table and a chair with fast wifi. But he now knows that what he really needs is a community of entrepreneurs and other people that weren’t going to regular 9-5 jobs but were trying to get something started, or working with a contractor, or doing a new startup, that was really the valuable thing that, again, he wished he had had.
Little Engine Ventures
Little Engine Ventures follows that same way. LEV is the option when he wanted to start his business but it didn’t seem like there was a good option for the size or type of business that he had created in DelMar. So, he made changes at DelMar. Everything used to run through him. He was the limiting factor in that business. During the early days of the business, nobody else can do the stuff so Mikel does them, but at some point, he became the thing that pulled everything back.
Life went from a lot of fun to not very much fun at all and Mikel thought of selling the business, but he thought who would buy that little professional services firm if everything runs through him? If he quits the business then the whole thing is going to fall apart. And so he went into the office for 3 years working his way out of the job. He stopped writing codes for small projects, he stopped writing codes for big projects, he stopped managing small projects, and just worked his way out of the job until one day there’s nothing more left for him to do in the business and that he could now sell it. But then he realized that he doesn’t want to sell his business anymore because he gets to work on the things that he wants to work on and other people are enjoying their job more now that they were given them more economy and freedom. He could sell the business but he doesn’t have to, and he didn’t.
Their target market, though not exclusively, are small businesses with $1M-$10M in revenue and they’re getting ready to retire or move on to their next adventure.
How the LEV model works and why it works?
From a private equity financial standpoint, technically LEV is a private equity. For branding reasons, Mikel tried to naive that term too much into “We are a group of business owners buying private businesses.”
LEV is a private equity. They take control of the business. They buy 70%, and in most cases, they buy 100% ownership of the business from the retiring owner/operator. They tried to serve the market below where traditional private equities would go. Most private equities won’t go below a business with less than a million of EBITDA or those that are considered the micro private equity space. LEV tried to serve that market that doesn’t have an option. In most cases, those types of businesses are a little too small for a private equity group and a little too big for an employee to do a buyout. They also do well in businesses that are fairly late on the tangible assets because it’s hard to go to the bank to finance the purchase of that as well.
What do those 37 investment partners do?
Little Engine Venture’s 37 investment partners are technically limited partners. They invested in the fund, they don’t invest in any individual business, they trust Mikel and Daryl’s vision and to make the decision on who’s going to operate the business. They are from a few different walks of life but it all centers on small businesses. Almost all of them have been or currently are still small business owners. There’s a couple of folks that are in their early 30’s that have had some early success in business, but most of them are a bit older and they’re used to having a big chunk of their net worth in their own private business and so they liked owning small businesses. Almost all of them are from central Indiana and few are in central Illinois.
How did a variety of businesses get on board LEV?
From the outside it looks pretty diverse – and it is. LEV owns everything from roll up dumpster business to beer, skydiving, and a couple of egg companies. But if you look at them in different ways there’s a whole lot of similarities. There’s a financial metric – LEV is looking to buy businesses that are of a certain size of revenue. They wouldn’t have the cash to do it, but if they bought a $500M revenue business, those kinds of businesses have different types of problems and have a different way of solving even the same type of problems. Most of the problems in any business with 10 to 50 employees are the same in their function of the size of that business; how you hire people, how you fire people, what kind of benefits you offer. Even the type of person who wants to work for a small business versus those who work for the various employers in the area has a different mentality. If you know those things, there’s actually a lot of similarities.
LEV also has a model that they have to work with. They want every seller that they work with to have a very customized experience but on some things they have to be fairly systematized. That’s what they’re trying to do – build up a system so they can do a lot of things. They look for businesses that have good revenue. 30%+ gross margin is another one. If you have that kind of gross margin then you have the option to fund some growth without additional capital or heavy use of debts. Those are the kinds of things that both financially have to work but also have to tip towards the operational side of the business.
They’ve done two roll-up dumpsters and merged them. The 12 acquisitions LEV has done in 3 years roughly correlates with about 7 operating businesses. They’ve also done two auto glass companies and merged them. So that’s 4 companies merged down to 2, but even those 2 companies have a lot of similarities. Both businesses are basically logistics businesses.
We’re early adapters and formulators of new combinations
Little Engine Ventures is like a family office. They have 37 families and the only thing they do for the families is in the investment of businesses. They don’t take care of the vacations. They’re into adopting some new technologies but they’re learning to go slow a little bit on that. Instead, get into the business and really learn it. Don’t change things too fast because it freaks employees out. Sometimes you don’t know the unintended consequences of changing something. Sometimes the adaption of new technology is just catching up within the last decade of technology. Mikel would love to write a little logistics routing package. There are also software packages that they’re evaluating. Maybe they’ll adopt one of them, maybe they’re good enough. They don’t want to do things the same way they have always been done but they honor the principle by which the seller created the business. Things change and they need to adapt to new technologies.
What makes a deal an automatic No?
There’s probably one thing that isn’t really a function of a particular owner; if their gross margin is just too thin. That makes it a difficult acquisition for anybody that is financially motivated. Mikel is a financially-motivated investor. He and his team want to do good work too but they’re trying to create generational wealth for themselves. As far as more of what’s in control of the business owner, the number decision LEV has to make is the size of the business. Is this really a business? Or is it just some dude’s job with 10 people hanging around? Mikel was in that same place before but he came out of it.
Small business owners like to do things their own way. But sometimes, they need to put a brake on themselves and not make it about them and their small business.
What is your best acquisition and what made it great?
Aside from his children, Mikel chooses Lafayette Tool and Die as his best acquisition. It has been around for 20 years. Larry Skinner started Tool and Die in 1995 when his previous employer moved manufacturing to Mexico. He bought some of the equipment that were not included in the move at a very discounted price. His previous employers are still keeping some manufacturing work in Lafayette and Larry turned them into one of his first customers. And then all typical manufacturers are using Lafayette Tool and Die at least a little bit. So, it’s a really great business as far as not having customer concentration. It’s a craftsman’s workshop, people who take pride and value in their work.
Like Mikel, Larry is a guy who never really intended to be in business. So every minute that Larry is not at the lane or running the CNC machine is a minute he doesn’t enjoy as much as doing that stuff. He prefers to be a craftsman. He doesn’t spend a lot of time thinking about how to improve the business, but he improves the quality of work. For Mikel, that’s what makes working with Lafayette Tool and Die great fun. The quality of the work has not been a question. Larry stuck around as a tool-maker, a craftsman that oversees everybody else. He no longer works 60-65 hours a week anymore. He is now working 35-ish hours a week and his wife enjoys that as well. And that transition has been a lot of fun. LEV has been able to come in and take care of the pricing, customer base, and other strategies. They ran that business for 13-14 months. They haven’t tried to make too huge changes but were talking about what kind of base they can build on to.
What do you see as the greatest challenge that’s facing business owners?
Everybody’s talking about the rising cost of health insurance, the difficulties of hiring good people, but for Mikel’s vantage point, the challenge of a small business owner today is that there are so many options for how to share their business and how to grow it. Tyranny of choice. Some folks would be just, “Should I outsource this? Should I outsource it locally? Should I outsource it overseas? Should I add more services to my business?” and then, “Ugh. I can’t figure it out. I’ll just focus and do it the way I’ve always done it. I’m not going to look at any other way to do my business.” New technology is around, another business model is around, some folks would just shut down. And then other folks are the opposite. They never get any actual work done because every 6 months they come up with some new things and about the time they get it working, they quit. So, finding the balance is hard.
As you look at these deals, are you looking at the end in mind?
When looking at deals, LEV is looking at what these businesses can become and also looking for good deals that can provide an earning stream that can provide the return for their 37 partners. LEV’s model allows them to own these businesses indefinitely. They need to consider if it can be a good business, what it looks like in 10+ years. They look at some stuff in the industry that is slowly dying, they take in cash flow, provide a dividend, and hopefully grow the value for everyone that’s involved in Little Engine Ventures not just for the investment partners but also for the employees because it means there are more opportunities for them. As the business grows more profitable, you can pay people more, get more customers and serve more people.
If I have a company and we agreed on price terms and conditions, what does the last 30 or 60 days before the deal is done and then the first 30 or 60 days after the deal is done look like?
For LEV, 60 days prior to closing they’re probably signing the Letter of Intent. Their quickest Due Diligence process has been 45 days. The last 60 days before the closing is basically the term of their entire Due Diligence process.
The first 30 days of owning the business are spent assessing all that they got. You don’t really know the business until you bought it.
Mikel’s advice that would have the most immediate impact on business value
Go into your business every day and work yourself out of the job. If you can have that kind of mentality, then you have a business that you could sell because you can step away from it. You can do other things to maximize the price, you can do other things to make the transition faster or slower, but good small business owners value options. Mikel thought he was changing DelMar so he could sell it, but the changes he needed to make to sell the business made it a better business, and so he then didn’t have to sell it. And so Mikel had options; he could sell it or he could choose not to. You don’t want to be a forced seller. If some things happen suddenly, you want to be in a position where you can step away.
Are business owners that are selling prepared for sale?
It’s probably a self-selecting process and some are not prepared. The folks that are prepared have a succession plan in place; they pass it down to one or two key employees, they are successfully been acquired by a strategic competitor in the space, etc.
Early on, LEV is looking for folks who haven’t planned ahead, but Mikel is also meeting folks aged 65 or 60 who have been thinking of selling.
Connect with Mikel Berger
You can connect with Mikel through these channels:
Official Company Twitter: @LEV_Capital
Mikel’s Personal Twitter: @mikelberger