In today’s episode, we sit down with Bud Moore, who is the founding partner of Valesco Industries– a lower-middle market private equity firm in Dallas, Texas. We love everything Valesco is doing, especially because there is a large need for their expertise, guidance, and capital in the lower-middle market.
“Our ideas are muscle, and so we put that behind companies to help them grow and become a bigger and better version of what they were,” says Bud on the topic of how Valesco came to be.
We’ll chat about Valesco’s primary markets, value-added distributions, and…
- Moral and ethical commitments
- Banishing preconceived notions
- M&A trends
- Rep & Warranty
Mentioned in this episode:
Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. We’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Bud Moore, founding partner of Valesco Industries, which is a lower-middle market private equity firm based in Dallas, Texas. Bud, thanks for joining the podcast today.
Bud Moore: Hi. Patrick. I appreciate you including me.
Patrick: The reason why we reached out to you is that there is a growing ocean of opportunities in the lower-middle market. There are more and more opportunities. We are seeing not only in here in Silicon Valley with technology, but throughout the country for a variety of reasons.
And as I speak with experts in m&a I’m struck by this growing chasm between the middle market and upper market companies and the amount of services and resources available to them. And then you get to the lower-middle market and there is just this crying need for not only capital, but expertise, guidance, and so forth. And it’s, there’s just this wanting audience out there that’s really looking for help.
And I think firms like Valesco Industries are ideal to come in and provide just the types of help that they need to move on. I didn’t want to steal your thunder, but if you translate or define the term Valesco, that means to grow strong, which is a very, very helpful name. And that’s where a lot of the lower-middle market companies are trying to be. They’re trying to do that before they ultimately go to an exit. So I appreciate you making yourself available. Before we get into all things. Valesco, let’s talk about you. How did you get to this point in your career?
How Bud Got To Where He is Today
Bud: So mine was a bit of a circuitous route. I started out actually in investment banking on the sell-side. And did that for a number of years in a market downturn, decided I would switch to the buy-side and did that for about four or five years until I found myself in a place that I was so full service for my clients that I felt like I was a private equity guy and not getting paid for it. So I thought I’d fix that problem and actually get into the private equity side of the industry.
And did that in 1994 as in what today is referred to as an independent sponsor. So our ideas are muscle and putting that behind companies to help them grow and become a bigger version and a better version of what they were when we made our investment. So did independent sponsor work really until the great recession of late 2007, early 2008 timeframe.
And during that period of time, we had exited almost all of our investments, I’d like to say because we were brilliant and saw a recession coming, but really more so people found value in what we had. And in that particular market, we’re paying quite well for what we build. So we sold what we had, and then a private moment, sat back and thought about what we hadn’t done that we should do next and thought raising a private equity fund might be a great idea. And so we set off to do that and raised our first formal fund in 2011.
I guess the lesson that I learned from that is, if you’d like a lesson in humility, you should ask everyone you know for money in the midst of the worst recession they’ve ever seen. But fortunately for us, it was successful. And that’s led into a successive fund and we’ve had great success and putting that to work and what for us is our lower-middle market companies and we kind of define that as 25 to $75 million in revenue.
Patrick: Okay, and then the industries that you target being based in Dallas, people are going to assume it’s either, and now, this is a Californianian speaking, but if you’re based in Dallas it’s either you’re doing something in the energy or the cattle industry. Tell us what are your specialty areas.
Bud: It’s a great assumption. We’re actually kind of embarrassed being here in Texas. We’ve never actually done an oil and gas transaction. And we really regretted that several years ago and went out and spent quite a bit of time doing a white paper on whether or not we should invest in the energy industry. And what we discovered was we just weren’t smart enough to do that. That’s a very complicated industry. So for better or worse for us, we’ve really focused on manufacturing, value-added distribution and business services.
And that’s been our focal point for a long time. And if you take a look at industries, there are some industries where we’ve had better luck in and others. The food industry has been good for us, heavy equipment, things of that nature. But I would tell you, we’re looking really more for a unique profile than a particular industry. And in doing that, we find really great niche market companies that we’ve had good succession growing and building.
Patrick: When you say unique profile either operationally, a need they’re fitting, location, what do you mean by that?
Bud: So and we kind of boil this down to three basic financial characteristics that define a broader list of operational characteristics. For us, we take a look at the EBITDA margin, you know, our principles say it needs to be 10% or greater. I would tell you most of our investments are far greater than 10%. We look at working capital efficiency being defined as inventory and accounts receivable as a ratio to sales being 30% or less. And we look at six asset utilization compared to sales for turns or greater. What that tells us is we’ve got a company that is in a niche market in its industry, it’s able to produce, it doesn’t burn working capital.
It generates working capital and doesn’t have to invest every dollar of earnings into its next dollar of growth. Let’s just roughly speaking kind of the principles that we’ve operated under. And as we apply that against industries that we’ve looked at and invested in, you’ll find really a broad variety of things all the way from aerospace to heavy equipment to food manufacturing. We even currently own one of the largest producers of drug testing for professional and amateur sports in the world.
So it’s a wide variety of things that we’ve invested in, but what we like a lot and we think this is true across numerous industries, and even in an industry that people would consider to be unattractive, they’re always one or two players that have figured out how to do it extraordinarily well. And what we’re looking to do is invest in those companies, work with that team to be able to continue to professionalize and build that business and really grow it into something of true significance.
Patrick: One of the things you mentioned earlier was value-added distribution is value-added. Explain that for me.
Why Value-Added Distribution?
Bud: Sure. Value-added distribution is we take a look at distribution. Commodity-oriented products really aren’t of much interest to us. We would define that as products that generally carry kind of a 20 or 25% gross margin, resulting in maybe a 5% 6% net margin at the end of the day. Unfortunately, if you want to grow in a distribution business like that, you’re investing this year’s earnings and next year’s growth.
And you really don’t really generate any free cash flow for your investors. You just invest in the business with, you know, with your end being when you decided to stop doing that. So for us, we look at businesses that are taking products and doing something tangible to them.
A great example, we invested in a business a few years ago that was producing high school promotional and high school fundraising items. So think of it as your local sports team for your high school but instead of buying cookie dough or pretzels or things that you probably really don’t want to support the team, you go to our online portal and you buy the team’s sweatshirt or t-shirt or ball cap and you support the team that way. We were mining substrates that are already manufactured, t-shirts, or anything that we were making.
But we would put on them the school’s insignia and then sell them out to their fan base. And to us, that was value-added distribution. And, you know, that’s the type of thing that we think really has, you know, great consumer desire in the marketplace. And we really like businesses like that, that have figured out a creative way to address a customer or consumer want or need.
Patrick: As I was researching your organization and looking through your website, it’s unmistakable that you see this undercurrent, talking about not only the financial component of what you’re doing and adding value to your investments and so forth, but there’s a real moral and ethical commitment that seems to drive your operations. Can you talk about that, please?
Ethical and Inclusive Operations
Bud: Sure. We, when we look at the investing in lower-middle market businesses, we really can’t make the claim that our money is greener than anyone else’s money. There are a lot of investors that try to invest into that space. What we focus on is how do we do the right thing for the business, the right thing for the employees, the right thing for the community. It’s something that’s extremely important to us.
And the way we look at it is, you know, every day the companies that we’re invested in are providing hundreds of jobs for people in the community that allow them to have mortgages, allow them to have, you know, pay for their family’s expenses and overhead and really creates the future for them in their community. And so, that’s extremely important to us. So rather than just putting money into a business, we really like being able to come in and make a difference in the business to make it a bigger and better company.
So that people have a career and not just a job and, you know, you’ll see that throughout our companies in the way we’ve invested in teams and in areas. Not all of our companies are in a lower-income community. But many of the people that work for our businesses may go home tonight to a lower-income community. And so we’re respectful of that. And you’ll find that better than 60% of our employees are minorities and the businesses that we’ve invested in, you’ll find that we have promoted women and minorities into positions of leadership within the companies.
And so we really, we believe strongly in people that want to work hard and apply their abilities, that we should be giving them the opportunity to succeed. And that’s been a driving principle for us. In addition to that, we try and spend a lot of time working with the companies themselves, to help people with a vision of how they get better in terms of their business. And I think that’s something that not everyone in private equity, actively does. And we’ve prided ourselves on doing that for a long time.
Patrick: I think as I got into working in mergers and acquisitions, you have a preconceived notion on how the players work and the relationships and so forth. And then when you get deeper into it, as you see, particularly if you’re a target company out there and you’ve got more than one option for prospective buyer or partner, financial partner. It’s not always the top-line number this out there that leads to a successful close or successful exit.
I always look at this as, you know, this isn’t company A buying company B. It’s people working together. Mergers and acquisitions as people. And one of the great value adds that I think private equity, your entire industry can deliver. Particularly for owners and founders is they can only grow so large on their own. And to take that next step, they need partners to get them there otherwise they may take a misstep or, you know, not get to where they want to get.
And, you know, the concept with private equity where I’m sure you guys do this, too is you know, making a partial investment or maybe rolling, they roll over some equity. It is amazing how an owner or founder may sell 60 70% of the equity in their firm to a private equity company. And then five years later, their remaining 30 or 40%, is worth significantly more than the original batch of equity they had sold over.
And I think that’s just that second bite of the apple is something I did not know about with private equity until I got into the business. And boy, that’s a real great thing, particularly for the people that are responsible for coming up with these companies and these services that in most cases didn’t exist until the owners and founders created them. And I think that’s a great thing you do. As you look you know, you’ve been involved with this for a while, are you seeing any trends in m&a that you can comment on?
Recent M&A Trends
Bud: I think the ones that everyone sees out there right now there’s just a lot of capital seeking return. And the public markets have been pretty good over the last year or two. But just in general, if you look over a more extended period, you know, those types of returns are not projected to continue.
And so people are looking for return. And as they look for returns, alternative investments, of which private equity is one, tend to drive a lot of interest. And I think it’s different in the lower-middle market. Looking at putting your money to work there is different than putting it to work and KKR or Blackstone or someone like that. This is money that’s going to work for which you’re going to have to put elbow grease behind it to really make it pay off in the right way. So as money comes into the marketplace, I think it has the hazard of increasing prices. It’s not great for us, it’s great for sellers.
But as it increases prices, you really gotta have a plan for what you’re going to do with the business because you can’t just put money in and step away and hope that that works out. So we think that the real trend that’s going on right now is, we can’t change pricing. So what we need to do is change how we look at the value proposition. And I think if you’re going to step up and pay a larger price for a company, in this market, you have to be convinced of how you’re going to grow that business going forward.
It won’t be for a flat company, it’ll be for a growth company. So I think right now, lots of capital in the marketplace, I think people looking for ways to grow that business and grow that enterprise are really the big things that we’re seeing going on. And then what I hope I’ll continue to see as more and more people focusing on the operations side of the business, to help make that plan for growth really come true. Because it’s all great on day one when you see the hockey stick projection of what we’re going to do over the next five years, but you’ve actually got to execute on that to be able to make it real.
Patrick: I think also that there are if you get a target at the right price, that capital tends to be a little more patient than other capital. And so I think it all, it goes in with that where you really do have to have not just this idea of an investment, but Okay, now how do we make it work five years down the road from now? And I think there’s a lot more focus on that delivery than just we have to get this target right now at whatever price.
Bud: No, I think your statement is right, as far as, you know, look, how you look at the investment, how you want to optimize it. but the thing that we try and keep in mind, it’s really more than just the day of the investment and it’s more than financial economics. If you want the economics to turn out in your favor, you’ve really got to get the team behind you. The people that you’re investing in, they have a business and yes, we’re buying in some cases, patents and we’re certainly buying brick and mortar and we’re buying machinery and equipment but what we’re really investing in is people.
And we’ve got to work with those people to help them be better at what they’re doing. We’ve got to create a relationship that makes them want to grow and build their business. We have to give them an understanding of how they win in this process. And I think doing all those things together really makes for the right investment. In our experience, if you’re selling a business, this is the most one of the most precious assets in your life. It’s really, it’s more of your family, in some cases, than your family itself.
You see people more that you work with, you’re there five days a week, if not longer, you’re there for long hours. And when you’re ready to exit, you have a lot of personal connection to those people and when you sell, you want to make sure that you’re selling or taking on an investor that’s got the same passion for helping and working with those people and growing them that you had. And I think that’s part of what makes an exit meaningful for people that are really looking and do it the right way.
Patrick: Bud, quick question. We didn’t cover this when we spoke earlier but just off the top my head, have you guys on any of your acquisitions or your transactions, have you guys use rep and warranty? I’m just curious if you have, what kind of experience you had with it.
Why Rep and Warranty?
Bud: You know, we’ve used rep and warranty on numerous of our transactions and really made that almost a universal standard practice probably three years ago. We’ve found it to be, it’s not covered that we have very often had any type of claims on. But I can tell you, it makes our closing process much easier. Dealing with the representations and warranties inside of a purchase and sale agreement is one of the scariest things that I think sellers deal with.
They don’t want to have their big payday and then turn around and write checks back to the company. They really don’t want to deal with big escrows that everyone’s going to argue about later, whether or not there should be a claim or not. And so what we found by using rep and warrant insurance, it’s really eliminated many of the discussions about what the reps and warranty should look like it comes down industry standard set of reps and warranties.
There’s a very minimal exposure on the sellers part. And from an insurance standpoint to the extent that you have a bad circumstance, that’s why you have the insurance protection there to be able to cover that eventuality. And we found that to be a really seller-friendly process. And so we’ve adopted that over the last few years as our standard.
Patrick: I could not have said any better than that. So I won’t. Thanks very much for that. Bud, how can our audience reach you? How can they find you?
Bud: Probably the easiest way is through our website valescoind.com. That’s valescoind.com. On there, we have all of our bios, our history, many of the videos on the management teams that we’ve worked with, as well as our contact information for easy access.
Patrick: And I would say it’s a story that is worth reading and worth following. Bud Moore, thank you very much for joining us today.
Bud: Patrick, thanks. I appreciate you having me on.