3 Successful Private Equity Deals We Closed (And How We Did It)

I'm always a bit reluctant to talk about the successes that we have because it just feels easier and more natural to talk about the failures and how you can learn from those. But to get an accurate and complete picture of what it's like in m and a and private equity, you kind of need to talk about the deals that were successful in addition to the deals that couldn't get closed. Today I want to talk about three deals that four Pillars has closed, and talk a little bit about why they closed, what was unique among the three, and finally what you can learn from those.

The first deal I want to talk about is the very first deal we closed Southwest Steel Fabrication. The deal closed in December of 2016. I can't remember if I've shared this with the audience yet, but originally the goal for my partner and I were to buy two businesses. One for me to run and one for him to run. This first deal was one that I found, and so subsequently I was going to be the one to run it. However, certainly wasn't smooth sailing. This was a deal that we looked at for a while. We submitted what we thought was a strong bid, but you know, ultimately the sellers decided to go with another buyer. You know, fast forward a few months, you know, get a call from the sell side advisor and tells me that it's back on the market. What we found out was that the reason other buyer was selected is because he had a unique business development angle that was going to help potentially bring in new customers and whatnot.

That was very interesting to the seller. However, that deal fell apart for, I can remember why setting up our ability or opening to get in there and potentially buy the business, even though we were able to get it signed up. And even though it took a long time to get it signed up, I mean, that was just the start of the challenge because my partner and I didn't have a huge bank account from which to purchase the company. This is a deal. We actually use an SBA loan on to purchase. Now we're gonna do a separate video on the ins and outs of an SBA loan, so be sure to keep your eyes out for that. But it was a very difficult process. I would say that perhaps the most difficult part of the process was just selling the bank on myself. You know, here I was.

I never run a business, you know, I was only, you know, 36 at the time. And, you know, people want to think that sometimes younger folks, you know, aren't gonna be able to run a business. And who knows? I mean, maybe they were right about me and they shouldn't have done the deal. But, you know, through the process or, or just through the continued dialogues and talking about what our plans were for the business and how we wanted to grow, ultimately we were able to get the bank comfortable with the deal in, like I said, in December, we were able to close on it. We still own that business actually. There's been a lot of ups and downs there, you know, as with any business really. But the real bright spot on that one is a real strong footing today, and I would say arguably for that business, the future has never looked brighter.

The second deal I want to talk about is Eagle Precision Manufacturing. This is the second deal that we closed. One that my partner left Kansas City with his wife and moved out to the Portland, Oregon area to run. Now really nice little business. I mean, they had some great customers great IP in terms of how to produce the products for their customers, you know, really nice little business. However, again, on this deal, there was the challenge about my partner's background this time, you know, he was gonna be the CEO and I had to go through the vetting process on the first deal, and now it was his turn to go through the vetting process. And, you know, I, I would say perhaps it was a little bit more challenging for him just because, at least for me, you know, I had a degree in an industrial engineering, which is essentially manufacturing and, you know, worked on some consulting projects for a number of different manufacturers.

So, you know, at least we could at least point to that experience. Whereas, you know, my partner's background was more in finance and financial services, you know, regardless, you know, through a lot of discussions and really trying to get creative about how we can, you know, reduce the, the risk of putting in, you know, my partner Thomas's, CEO, you know, I would say that through persistence and perseverance, we were able to get that deal closed. And my, how that business has changed since we bought it in 2017 now have three facilities. You know, three locations purchased a Bolton, which was a high precision machining shop, and man, similar to the first company, you know, Southwest Steel, I would say arguably the future's never been bribed for that one as well. So I know as well as anybody that futures can change very quickly when it comes to companies.

You can have you know, some of the sours in the economy or you lose a customer or whatever. But the good news, at least for those first two companies is that handling the basic blocking and tackling. And for a lot of businesses, that's about 90% of the challenge.

The final deal I want talk about today is Dark Casting. This is the most recently completed platform deal that we did. That one closed back in 2019. Now, what was different about this deal is there was no sell side advisor. I will tell you there are benefits and challenges whenever there's a sell side advisor involved. What I will tell you on this particular deal is that challenges really arose in two different areas, which really aren't too uncommon, I would say. You know, the first is, is working capital. You know, many business owners that are not familiar with the m and a process or what transactions look like in the lower middle market, their expectation is that they'll handle all the payables, but also they'll get the benefit of all the receivables.

So, you know, if your accounts receivable are $1.5 million, their expectation is that that one or $1.5 million will go to them, but it will not stay in the business. Now, you can structure the deal that way, however, the offer that we had made predicated upon that working capital staying in the business. Now, if that working capital were to be removed from the business, then we would have most likely reduced the purchase price dollar for dollar. That's, I don't want to say there's a standard practice, but I would say it is common for that type of situation to use that type of mechanism. If the seller doesn't want to leave the working capital in the business, you know, ultimately we were able to resolve that issue amicably and fairly from the perception of both the buyer and the sellers. So that was, you know, not a huge deal, but again, just something that, a challenge that you had to work through.

The other one was around reps and warranties, reps and warranties. I mean, I don't think I'll ever work on a deal where reps and warranties are not a, a fairly significant issue. The challenge here is that as the seller, you really want to not cut your ties with the business, but you know, part of the reason why you're getting out well for many sellers is you don't want the liability associated with the business, and you just want to be able to finally be free and not have that stress. Well, typically from the buyer's perspective, we want a policy that's kind, that is described as being, you know, our watch, your watch. What that means is that for something that happens on your watch, you would be responsible for indemnifying or paying for that liability. Similarly, if something happens on our watch as the buyer, then we would be responsible for it.

You know, I think generally speaking, people understand the concept and admit that there's a level of fairness to it. However, even though there's admittedly a level of fairness to it, that doesn't mean that they potentially want to be on the hook for that liability. The good news here, there is a way to resolve that. It's costly, but there's a way to resolve that. And what I mean by that, it's called reps and warranties insurance policy. So essentially what happens is the buyers and sellers work with a carrier that places insurance that protects both the buyer and seller against any claims due to misrepresentations or warranties. I'm trying to think, you know, depending on the deal, this could cost anywhere from probably at least a hundred thousand dollars. So you need to factor that in when you're thinking about, you know, whether or not that's a, a viable option for the deal that you're working on.

But in certain settings, in certain circumstances, it can be a useful tool to help resolve the differences on that particular point or various points of contingent that you have. Among all the representations and warranties. Now, when you look at these three deals, they were really very different. The first deal we did Southwest deal, that was an SBA loan. The other two deals were from our capital came from private equity funds, you know, institutional capital. The second deal had some senior debt, the third deal didn't. So, you know, really there's a lot of differences between those three deals. However, whether this is helpful or not, I always try and look for some of the commonalities among the deals just to see if there's any learning there. And the first one is really just a reflection of how difficult it is to get a deal closed.

I mean, there just has to be so many different stars that align in order for a deal to close. And, you know, this is not about the buyer being good at his job and the seller being good at his job or whatever. Again, just you kind of gotta have a little bit of luck for a deal to close. And sometimes you do get lucky and the deal closes, and sometimes you don't get lucky, and perhaps this deal still does close, it just takes longer or whatever. But sometimes you just get unlucky and the deal doesn't close. So regardless for all of our deals, a lot of stars have to align in order to get that deal closed. The second learning, or, or commonality, I would say, is that you really have to be sitting across the table from somebody that is willing to compromise to some degree.

I mean, I will say that we make every effort to really look at situations, you know, from the eyes of the person sitting across from us, you really think about, you know, what it's like to walk in their shoes, so to speak, when we're, we're talking about deal issues and I am loath to make, draw a line in the sand, like, we will not compromise on this. We will not compromise on this certain areas. I mean, really we just have no flexibility and we have to, you know, you know, statutory regulatory requirement or this or that. But, you know, generally speaking, very collaborative. My partner and I especially, are very collaborative and really just want to work together because view it as a partnership and, and we want to work together. And we don't want to be in a situation where we feel like we're being bullies or only considering our viewpoint.

We definitely make that effort, but as much as we make that effort, it really doesn't matter if we're sitting across the table from somebody that has to have things his or her way on every single deal point. We've definitely been in that situation. In those situations, I'll often talk with my partner and ask him, are we being too flexible? Are we just being pushovers by accepting everything that the seller is asking for? And in some circumstances we finally say, yeah, I mean, we are, you know, if we give anymore, we are just being pushovers. You know, we need to stand up to let them know that yes, we're willing to deal, but we can't just accept every change that is requested. So that's really a major part of, of getting a deal done, is not that we have to have things our way, it's the acknowledgement, you know, nobody's gonna get everything their way, and you really just gotta find a way to meet in the middle, so to speak, and resolve those issues of contention.

The third one, and it relates back to a video we did recently on persistence and, and perseverance. Gotta have persistence and perseverance in on these deals. I mean, all of the deals that we've worked on, you know, took a long time. Variety of reasons. You know, there was on one of the deals, the pandemic was involved on another deal. There were a few things that we had to resolve. And on first deal I talked about, you know, we lost out on the deal for several months and had to wait on the sidelines before it came back to us. So in addition to, you know, having folks that are willing to compromise and just getting a little bit of luck, you have gotta be just a dog in continuing to pursue the deal and not giving up. Because if you're anything other than very persistent and making perseverance a goal, then I don't know, I'm just not gonna say that.

I think your odds are that great in getting the deal closed. So those are the three successes we've had at four Pillars and some of the differences, but also the common themes among those three. Now, I'd love to hear from you, like if, if you've worked on a transaction, was it ultimately successful? Did you get it closed? Or if you didn't get it closed, I mean, what happened? I would love to hear from you because it's a topic that not only is interesting to hear about, but we can all learn from hearing about why deals closed and also why they failed.