In this episode of the M&A Launchpad Podcast, host Casey Minshew interviews Cory Sandrock, Managing Partner of Pareto & Company. Cory shares his unique journey from theater to private equity, highlighting the nuances of independent sponsorship versus search funds and the critical role of teamwork in successful deal-making.
He dives into lessons from his first acquisition, funding strategies for independent sponsors, and a detailed case study of an HVAC deal. Cory also explores the future of independent sponsorship, the importance of understanding financial health in acquisitions, and practical advice for new investors.
Whether you’re an operator, investor, or entrepreneur eyeing your first acquisition, this episode provides grounded strategies and behind-the-scenes insights into the deal-making process.
In this podcast episode, we discuss:
- Cory’s journey from theater to private equity
- Independent sponsorship vs. search funds
- Teamwork as a cornerstone of deal-making
- The importance of assessing financial health before acquisition
- Lessons from Cory’s first acquisition experience
- Funding strategies for independent sponsors
- Case study: HVAC acquisition and deal structuring
- Incentivizing management teams for growth
- How to differentiate in a competitive M&A landscape
- The future of independent sponsorship and advice for new investors
Guest Contact Info:
LinkedIn: https://www.linkedin.com/in/corysandrock/
Company: https://paretoandcompany.com
Email: csandrock@paretoandcompany.com
Sponsored by O’Connell Advisory Group
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Patrick of O’Connell Advisory Group is your Dynamic Quality of Earnings Partner.
He’s here to help you buy the right business on your timeline.
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M&A Launchpad Conference
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This is the premier event for entrepreneurs, investors, and dealmakers in the lower-middle market.
Get your ticket at https://www.malaunchpad.com and use code LAUNCH for $200 off.
Additional Resources
- Contact the hosts Casey Minshew or Feras Moussa at info@equity-launchapad.com
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Additional Resources:
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🎧 Podcast on YouTube: https://youtu.be/8mYw1neApjg
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🎧 Podcast on Apple: https://podcasts.apple.com/us/podcast/journey-to-independent-sponsorship-with-cory-sandrock/id1740382586?i=1000729716032
Transcript
00:00 Hey there, this is Casey with the M&A Launchpad podcast. Want to let you know about October 25th. Put it on your
00:07 calendar. This is a do not missed one day event. There’s going to be incredible headliners, but really at the
00:14 end of the day, you’re going to get a chance to talk to people that have made acquisitions, learn from some of the
00:19 challenges that they’ve made because this is definitely a challenging process. But more importantly, there’s going to be people there that can help
00:26 you and support you along the way from great vendors, quality of earnings, how to run the due diligence process, and
00:32 how do I get financed, how do I raise capital, how do I structure all of these things. October 25th in Chicago, we’re
00:39 going to be gathering. It’s going to be hundreds of people that are all focused, like-minded people. And man, everyone
00:45 that’s come has given us incredible feedback. So, mark your calendar. October 25th in Chicago. We look forward
00:51 to seeing you there. All right. Right. On today’s episode, we interviewed Corey Sandro where we talked about what it’s like to basically get
00:57 out of theater, get into private equity and really start to buy businesses and build the business focused on being an
01:04 independent sponsor and identifying business. And we did a deep dive into basically buying an HVAC company that
01:09 had a, you know, great successful exit, had the right person in place to go ahead and build on and grow on. And
01:15 then, you know, really start to digest really what’s the mentality of a seller, what’s the mentality of buyer, and how
01:20 do you get deals done, right? It’s not a one person accomplishes it all. It’s a team sport and so what are the players
01:26 there and how does it all work together? So Ben, what were some of your take? I think you know I mean very interesting
01:32 guest today and I think at the end of the day, you know, he has an interesting journey. He started off in theater. He worked on Broadway, you know, he put
01:38 theater projects together and I think he’s he started seeing himself kind of gravitating more to the business side of it and I think that’s what led his his
01:45 journey to being an independent sponsor. But I think in today’s episode I think we really kind of try to unpack the
01:51 differences like there’s obviously there’s a searcher there’s an independent sponsor what is the difference of that and ultimately you
01:58 know trying to understand you know in this climate right in this kind of competitive environment like which one’s
02:04 best right and really I think it’s dependent on what you want to do so love some of the takeaways that he had. I
02:09 mean, he’s he’s been in the the the trenches, but he’s also been on the board and he’s raised money and done
02:14 creative deals. And I think you’re going to kind of talk about that. Like we said, on the HVAC side, there’s there’s some greatest deal structure stuff, you
02:20 know, but ultimately very very interesting episode talking more about the independent sponsor world. And uh I think it’s something that people need to
02:26 take uh take into consideration.
02:55 Yeah. And ultimate core is just like us. He’s a deal junkie, right? So we talk about kind of putting those together. Yep. Love it.
03:00 This one. [Music]
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03:29 Click the link in our show notes. Can’t live without. Hey Corey, welcome to the show. Thanks so much for having me.
03:35 No worries. Look excited to see you here in a couple weeks in Chicago. So, for the listeners, you want to just share a little bit about your background and
03:42 kind of what you currently do? Sure. My name is Corey Sandrock. I’m the
03:47 managing partner of Paro & Company. We are an independent sponsor that I founded in 2016. And we like to invest
03:55 in good businesses in really fragmented industries like services, B2B products,
04:01 niche manufacturing, things like that. And also, fun fact, I was a theater major undergrad. So, I’m actually a fun
04:07 creative guy in addition to being a numbers guy. Ain’t nothing wrong with that. I like to say my my whenever I used to work at
04:13 Microsoft my manager used to have a music degree and he was a program manager manager. So so anyone can do
04:20 anything. So I guess you know with that said Corey I mean maybe share with the listeners how did you get into the space right? What was that first acquisition?
04:27 Sure. So like I said I was a theater guy by original training. I was mostly a producer writer director. I mean yes I
04:33 was an actor once upon a time but you know as I got through college and then exited I went to New York. I was I was
04:40 creating productions. I was putting shows together. And the funny thing is being a theater producer is being an
04:46 independent sponsor. We don’t call it that. That’s not cool to say, but it’s basically what it is. You know, you’re
04:52 going out, you’re you’re putting together an idea, a concept, an investment thesis, and you’re raising
04:58 money for it. You’re hiring the actors, you’re adding value through operations, right? Meaning managing crazy actors.
05:04 And then closing night, everybody’s fired, and you start all over again. And so, you know, really my my my whole
05:11 original career was doing what I’m doing now. I just didn’t know that’s what it was. And so, when I went to business
05:18 school, I went because I thought I wanted to keep doing theater and do it at a higher level. And then I
05:23 accidentally fell in love with economics and finance and accounting. And so then the quest was, you know, how do you sort
05:28 of merge the two together? And I did a bunch of different things within the broader finance space. I was a
05:34 commercial banker. I was an investment banker. I worked in private equity once before. Along the way, I kept meeting
05:41 more individual investors who had this idea of doing private equity a little different. You know, we all wanted to
05:47 put money to work, but we wanted to somehow be involved, not just put our money in a fund and hope it works. And
05:53 so ultimately, I founded Paro and Company to try to do that. Now, this was
05:59 2016. It was before independent sponsor was a defined category. It was really
06:04 even just the beginning of the search fund idea also. And so there was this kind of idea that maybe there’s a
06:10 different way to do private equity, but we don’t know what it is. And so in those first couple deals, it was how do
06:17 I do a private equity deal with no fund? And you know, how do I find good
06:22 opportunities? And so, you know, really our our first two opportunities that we
06:28 found were I’m at a conference, I meet a CEO, the CEO is telling me about the
06:35 product. It’s interesting. I know an investor that I know that I’ve done deals with is in the space. Okay, I can
06:42 have an opinion about this. Let’s dig in more. Let’s start talking. and it really
06:47 kind of set the stage for subsequent deals that we’ve done because of the fact that all the actual businesses that
06:54 we have acquired that we’ve closed on are proprietary deals. So, I’m not going to auctions to, you know, business
07:01 brokers, investment bankers. They’re great resources, but my experience has been I want to go talk to the actual
07:08 owner and try to get to know them and figure out particularly not just because
07:13 then you’re not competing against somebody, but also because then I can explain a little bit more about us.
07:19 Because for that owner that wants a really big check as fast as possible, we’re never going to be the partner.
07:25 That’s just not how you get independent sponsor deals done, right? You got to put the pieces together, find the capital, find the people, and and and
07:31 mix that cake into something awesome. And so, if you kind of miss that phase
07:37 of the get to know you, it’s harder to, I think, get the deal done. And so, to
07:42 your question, those first couple deals, you know, these were smaller investments in smaller companies. One we still have
07:48 in our portfolio. It’s a fintech company. They make software for financial advisors. And it was literally
07:55 I met the CEO at a speaking engagement and he and I were sitting next to each other in the audience and got to talking
08:01 and it kind of escalated from there. And that was maybe a a good kind of
08:07 precursor of hey this is the way to get it done. These are the ways that someone will want to talk to you because you’re
08:12 not big private equity. Got it. So a lot to unpack on that. So
08:17 first of all let’s go back to the theater part, right? And Ben can speak to this. We have a friend in the theater business and I’ll let Ben kind of share
08:24 how that friend talks about investing in theater. Yeah. I mean I think you know I mean he he did well I mean yeah I would go ahead
08:30 and say I mean he’s one of the guys on Hamilton. I think he did Mulan Rouge. I mean you know so I mean and he lives in New York and you know we met him you
08:37 know through our commercial real estate journey but I mean ultimately he equated you know investing in theater production
08:43 as like you know do you like to gamble your money away in Vegas right? You know because it really is a crapshoot. And I
08:48 think, you know, and I’m sure some there’s probably some mechanism that you can derisk those types of deals, but at
08:54 the end of the day, it’s like it’s like drilling an oil rig or trying to put a movie together, right? You’re never going to know if you’re going to be
08:59 successful, you know? Um, so I would imagine that was a little bit of that journey for you, too, right?
09:06 Definitely. You know, the hardest thing when you think about articulating a return profile for a theater investor,
09:14 it’s really more like VC, right? In the sense that you’re making to your to your
09:20 point, you’re you’re making a gamble on an idea that really has no comparable
09:27 deal to look at, right? It’s not like you can say like, “Oh, Hamilton is exactly like this other musical.” It’s
09:32 not. It might have elements, right? Oh, this actor or that actor is in this other musical that was really successful.
09:38 Great. They might have been awesome in that musical and horrible in this one. And so, it’s really not comparable in
09:44 any traditional sense. And so, you’re right. I mean, a lot of what you’re selling in the theater is the idea of
09:52 being inside the tent. You’re one of the cool kids. You get to come to the
09:58 afterparty. You get to go do the red carpet. That’s what’s really fun and exciting. we think there’s a return and
10:04 here’s our proforma but it might be zero right that’s what friend said too a lot
10:10 of people you know it’s that feeling and I think it’s the difference between speculating and investing right
10:15 speculating is you’re making a big bet without a lot of consistency history you know whatever you call it versus I think
10:23 going down you know your path right you got into economics started to understand investing where it’s based on core
10:28 principles repeatability right some of these other mechanisms that then open up your eyes and kind of okay this is what
10:35 investing is about right I think that’s and I don’t I don’t want to put words in your mouth but I’m guessing that’s what attracted you to kind of getting into
10:42 where you got right I think that’s right at the end of the day the tricky thing with theater again
10:49 and I think the the correlary to venture capital is a is a apt one in the sense that you know if you think of a classic
10:56 venture capital fund who’s going to invest in maybe 30 to 40 startups Their
11:02 playbook is, well, we’re doing 30 or 40 because we know that 35 will be zero.
11:08 You know, four will be okay to maybe making a dollar and one will be $3
11:13 billion. And so the one winner will pay for all the losers. And if you’re
11:19 thinking of it that way, it’s fine, right? Because then you are making kind of to your point speculative guesses.
11:24 But if you do enough, the numbers bear out. And theat’s the same way. I mean the big organizations if you think of a
11:31 corollary here being the the archetype of an investor being a traditional private equity or venture capital fund
11:38 those are the Broadway headliners you know those are the Schubert organization folks the really useful group Andrew
11:45 Lloyd Weber’s company right these are the big producers where they can do those 30 and then they can lose money on
11:51 a bunch and then they have a winner they have a Hamilton right they have a Phantom of the opera that can run for a
11:57 long time and can make them all that money. And so, you know, to your point, it’s a it’s a hard pill to swallow as a
12:05 creative, you know, somebody in my position where I might have had a great idea and a great show that I wrote or I
12:11 was directing and I’m like, “This is the, you know, this is such a cool thing, right? And I got this this actor
12:16 who’s the next next next next Tom Hanks and, you know, we’re gonna be awesome.”
12:22 And if it can’t make money, it can’t make money, right? Like that’s that’s just life. And and so, you know, it’s
12:27 it’s a little bit of understanding for me. It was understanding the economic tools to be able to explain why maybe
12:35 didn’t make me feel any better, but at least I could explain why my show was unsuccessful versus an actual
12:41 investment. And so, I’m kind of curious. So, you know, kind of you starting off in that space, right? Obviously, there is a
12:47 financial component to it, a raising equity component to it. So there is some similarities but like how did that kind
12:53 of really dive a little bit deeper into your journey from that into the private equity and you even said that you were
12:59 on the investment banking side you know I mean like that’s a that’s a total those are totally different worlds you
13:04 know yes everybody’s money is still green but you’re like how did you go from that and and and ultimately you
13:10 said that you kind of started you know seeing yourself liking that more so what did you like more about it versus the
13:15 theater space too? So at the end of the day, I’ve always, I think, been a little
13:20 bit of a rightrain, leftrain kind of person. And so, you know, even when I
13:26 was a theater major in undergrad, so I went to Northwestern here in Chicago. And it’s a great theater school, right?
13:32 Top five in the country, lots of famous people, Charlton H, David Schwimmer, you know, you name it, right, has come out
13:38 of that school. So, I knew I was getting a great theater education. I knew I was preparing myself for that field. I also
13:45 took physics. I also took linguistics. I also took you know some other science and math kind of because I always had a
13:51 an interest in understanding things and deconstructing and so it was always
13:57 there in the back of my head. I think you know once I got to business school so I went to the other end of town I
14:03 went to Chicago got my MBA that’s known as a quant school right I went there because I specifically wanted to get the
14:10 stuff I hadn’t gotten in undergrad and so I think for me it was an aha moment of now I have some quantitative
14:17 scientific tools I can use to explain some things that were frustrating to me
14:22 in the theater world. How can I deploy those tools right? how can I kind of
14:27 like exercise that muscle that’s a little different than my creative muscle, but how can I use that? And so
14:33 my first job out of business school was actually in wealth management. So I went to UBS. I was in wealth management. And
14:39 for me, I thought like, well, that’s like an easy leap because it’s like, okay, I’m talking to rich individuals to
14:44 try to get them to put money in my play. Now I’m going to talk to rich individuals to get them to give me money
14:50 to invest. Right? So I’m like, that’s like a pretty similar conversation, right? And and frankly, actually, funny
14:56 story, my my biggest uh client that I landed in those early days, we ended up
15:02 in my first meeting with him, all we talked about was Shakespeare. Like once he heard that I was a theater guy, he
15:07 was a theater guy, too. We sort of geeked out about Shakespeare, talked about the Cordo edition versus the Folio
15:13 and, you know, do did things like that. And and so I ended up like winning the business having shown no prowess in
15:19 investing or talking about what we were going to do with this money, but just because there was like a similar, you
15:25 know, bonding over what we liked. And so I think it was a series of things like that where the more I did in finance,
15:32 the more I was always looking for how can I be both creative and use the
15:38 quantitative, you know, how can I how can I kind of merge those two? I mean e even when I worked in private equity so
15:44 I worked for a fund that was buying commercial banks and this was pre great
15:49 financial crisis and including through great financial crisis and so that was
15:55 really creative and entrepreneurial because it was a brand new fund. It was somebody I had worked for. He and a
16:02 couple of other partners were starting the fund had breakfast and he said do you want to come be the first employee?
16:07 And I was like absolutely right like how cool is this? I get to go jump off a cliff with a bunch of other people and
16:12 build something new. That sounds interesting and creative. And so I think it was just a natural evolution to then
16:20 going on my own and founding paro and company because I had found enough people that were like-minded who could
16:25 be investors. And I had found enough opportunities that needed some kind of
16:30 management help where I couldn’t just do it as a passive deal on the side of my life, right? Like I needed to be
16:36 involved. I needed to help with M&A. I needed to bring in other, you know, smart investors who could add value.
16:42 And, you know, ultimately that’s what created Paro. We didn’t know we were
16:47 independent sponsors, right? The term hadn’t been coined yet, but that’s sort of how we ended up in that seat. And we
16:53 continue to do it because I like that interplay of the creative and the quantitative. Yeah. So, so let’s dive into those
16:59 deals, right? I mean, what were the first couple deals you found? How did you fund them? How did you find them? Yeah. And kind of how did they pan out?
17:06 Sure. So, you know, like I said, Braome Company has been around since 2016. We have done a total of five platforms over
17:14 that period. The platforms themselves have included a total of about 35
17:20 acquisitions as we’ve built these platforms. And so, you know, all of them
17:27 have been a proprietary sourcing methodology in terms of calling somebody who calls somebody who gets me to
17:33 somebody, right? And so I guess, you know, there’s other ways to do it. Of course, I’m sure other guests on your on
17:40 your program might may tell other stories, but for me, it’s always been again following that curiosity path and
17:47 saying, “Well, who do you know?” Or or how do I get to somebody and and and
17:52 what do you know about this industry that’s interesting? And so, you know, of the five, like I said, our first deal
17:57 was a fintech business. We found that through again I was sitting at a at a conference with the CEO like literally
18:05 next to each other in a room and just started talking and kind of escalated from there. That deal we funded entirely
18:11 through individual high netw worth investors. So that was you know our first foray where we went out and you
18:17 know people in my network that I knew one had been account an accountant that I knew you know I had worked for one of
18:23 them once upon a time one of them was also in wealth management so was kind of in my circle from UBS you know things
18:30 like that right people I had just gotten to know so that was kind of classic pass the hat investing
18:35 um our second and third opportunities came through sort of my broader network
18:42 so one was actually another independ ind dependent sponsor in Chicago again in
18:47 the early days of when we both didn’t know we were independent sponsors but in that deal you know they were bringing a
18:52 chunk of the equity we were really technically the co-investor right so we brought a bunch of equity again through
18:58 my individual investor network and a couple of family offices were in there as well and so we we capitalized that
19:05 through you know both of our respective networks plus then we partnered with uh
19:10 Capala they’re a fund out of of Charlotte and Atlanta, they have a
19:15 number of both debt and equity solutions. They they were the debt and a little bit of equity in that deal. So
19:21 that allowed us to get that deal done and that deal. And then how big are these checks that you’re basically
19:27 putting together? Good question. So kind of gauge. Yeah. Yeah. So So that one um was a
19:33 compounding pharmacy business. Um our equity contribution to that one was about $4.5 million, $5 million. um
19:41 similar from the other sponsor. Theirs was slightly larger but you know roughly comparable sizing there. And then um
19:49 Capotala on the debt side you know they were bringing ultimately the debt in that business grew to something more
19:54 like 50 60 million out of the gate and then kind of expanded beyond that. So
19:59 you know sizewise we’re generally targeting platforms in the 3 to 7
20:04 million of IBITa range. Um, obviously revenues vary based on the industry, but
20:11 you know, we’re kind of targeting that size for for out of the gate. And so, you know, those were smaller deals,
20:17 those first couple. Um, our our fintech business, you know, our initial investment was a couple hundred,000. So,
20:23 you know, we’ll we’ll go as small as something like that. More recently, I’m sure like many folks you’ve talked to,
20:29 we we see the market kind of expanding and moving up market, right? So, as we’ve looked at deals, we have had to
20:35 kind of go up with it, right? Ultimately, if we’re delivering something to a capital provider, they
20:41 want to have something that fits their metrics. And so, our our best deal to date, um, we we had an HVAC business, a
20:49 residential service maintenance HBAC business. Uh, we did that deal with two
20:54 groups. So, Capella, again, they’ve been a great partner to us. They wanted to they liked us enough, right, to to want to do something again with us. And then
21:02 they brought in a fund called Summit Park. They’re based in Charlotte. And so that deal had three names on the cap
21:09 table. Summit Park was the lead equity. Capala had a little slice. Paro had a little slice. And that one was out of
21:16 the gate about $30 million of equity. And we had a a debt facility in waiting
21:22 basically to do the add-on acquisitions of about another 30 million. And and so,
21:28 you know, that’s where you can see that the scale got bigger kind of as we went. So, what year was that? Sorry. And then
21:34 the uh the HVAC deal. So, we we closed the platform acquisition in January of
21:41 2021 and we then did six add-ons for that
21:46 platform and then sold it last uh March 31st. Timed it perfectly on that.
21:52 So, I was curious on that 30 million in equity. Sorry, are you just buying were you buying that business all cash or I
21:58 mean excuse me all equity and there was no debt at the beginning. So on that one yes because we knew for
22:04 the HVAC deal we were we were you know very sure that we wanted to do a buy and
22:10 build you know add-on consolidation strategy. We knew obviously by that
22:16 point the HVAC market was getting hoter I guess you could say. I mean, it wasn’t the total insanity that it got to, but
22:22 like it was in the early days of the expansion of multiples and the and the the focus on that. So, you know, we knew
22:28 we needed some capacity to go do subsequent add-ons. And so, that one, yes, we did, you know, basically 100%
22:34 equity day one. There was a rollover component. So, the platform that we
22:40 bought had a situation where the original owner founder had owned it for 40 years, built a great business. It was
22:48 33 million in revenue and like four of IBIDA when we bought it. And
22:54 5 years before we acquired it, he had brought on a a a new CEO who had
23:00 literally done everything in the company. He had started as an intern in college and been a technician and then
23:06 he was like a manager of one branch location and then he was a regional, right? Like he had worked his way up. Smart guy, young guy. I think it was
23:14 50-51 when we bought the company and he had these great ideas about how to expand, you know, he knew a business the
23:20 next state over that he wanted to buy that was a friend of his, right? And he he wanted to build a second training
23:26 center for the technicians and he had all these great ideas and the original owner was at a point in his life and
23:32 career, right, where he was saying, “Well, I don’t necessarily want to spend a ton of my money to do all these things. The business is doing great,
23:39 right? It’s throwing off cash. I’m the like, you know, 90% owner of the business. I’m getting all this cash.
23:46 And so us buying it enabled that young CEO to sort of execute on his vision,
23:52 right? We and Summit Park and Capella got behind this guy and said, “Yes, we should totally do that. Let’s go.” And
23:59 you know, again, from a collaborative standpoint, the original owner rolled over about 25% of his his equity and
24:08 stayed on the board and ended up getting a check that was almost double the size of his first check when we sold it. So,
24:14 nice, you know, worked out great for him and we still, you know, we still benefited from his his knowledge, right? He had
24:20 been in the industry for 40 years. He knew stuff. It’s just that, you know, he needed to be more of an advisory role,
24:25 not a day-to-day. and we needed to enable the day-to-day guy to go do what he wanted to do.
24:30 So, I was going to curious, is that the strategy within the firm? Because I mean, everybody kind of does this a little bit differently. And then I want
24:36 to kind of touch on, you know, the the the next phase of what you see in independent sponsors and searchers and
24:41 all that other stuff. But before that, like kind of diving into this specific acquisition or or you guys’ buying
24:47 thesis. Is it always to, you know, maybe buy out the the original owner, founder
24:53 and then make sure that somebody internally is there or do you guys ever, you know, recruit externally and then
24:59 put these people in, you know, you taking them off the bench and put them in a CEO? Like what usually are you guys looking for? Because we’ve seen it done
25:05 a thousand different ways and I’m curious what which one has been more successful. What do you guys do?
25:10 And on that same vein too, how did this deal come about, right? Like you know, someone had to put it together, right? Where did you find it? you know, I
25:17 identified that it had the existing operator, etc. What are you talking about? It fell from the sky. I was just waiting for the
25:22 phone to ring. Right. It was so easy. You just pick up the phone. You’re like, “Hey, you want to sell?” “Yeah.” “Yeah, I want to sell. I want to sell right now and and I’m not
25:28 going to negotiate at all. I’m just going to sign the paper.” Right? You know, there you go. No, look, it it was So, maybe I’ll
25:34 answer the second question first and and say, you know, so how did we get to this deal? We had been thinking about what
25:43 our next thesis was going to be since about, you know, late 2019 into 2020. We
25:51 had we had just closed on the first couple acquisitions for our dental laboratory business. We had a dental lab
25:56 business and so we were at a point in that growth of that business where, you
26:02 know, I wasn’t doing the day-to-day M&A hunting as much. And so myself and my my
26:08 partner, I have a partner in LA, I’m here in Chicago. You we were starting to brainstorm about what’s the next step.
26:15 And we had heard from some folks here in Chicago about, hey, some, you know, M&A’s happening in in HVAC. There’s a a
26:23 couple of funds here in town that we knew had had some exits. So, you know, I was able to get to a couple people I knew who could give me some feedback of
26:29 like, yeah, there’s something here. And for me, it’s always I don’t want to be a lemming, but if other big funds are
26:37 spending lots of money, more money than I have and and throwing more people at the deal than I have to pursue an
26:43 industry, that’s interesting to me, right? And I want to know why. And so, we just started calling a ton of HVAC
26:49 companies and trying to see trying to get to owners that wanted to talk to us. And I started reaching out to like
26:54 investment bankers, business brokers, right? other kinds of inter intermediaries in the space just to say
27:01 who should we talk to what’s going on and so we ended up getting to a kind of boutique bank that only did HVAC and
27:09 interesting they weren’t running a process for this deal but they were like hey there was this company that we had sort of been
27:15 working with but like they’re not really you know in the middle of trying to sell but they certainly think they might want
27:21 to sell like do you want to talk to them so it was more of a referral than a than a than a process Right. It was more hey
27:28 that you know they knew them, they put us in touch and then really we just started talking with these owners and
27:33 the more we heard about what they wanted a I recognized as I said before that
27:39 they had kind of different visions, right? Like the older owner was like I want a lot of money
27:45 and the younger guy was like Yeah. And the other the younger guy was like I’m not done yet, right? I’m young
27:51 and I only have I think he had like 2% of the equity at at that point, right? and he’s like, I don’t, you know, to me
27:59 this isn’t going to change my life if I sell and get a few dollars. I need to grow this thing bigger. That’s what’s interesting to me and I’ve been doing
28:06 this a long time and I have some ideas. And so to answer your first question, yes. I mean, our strategy is almost
28:13 always, can we build around somebody that knows what they’re doing? You know,
28:18 I’m self-aware enough to know I do not know everything. I’m the first to admit
28:23 that, you know, especially like something like HVAC. I mean, if I tried to fix that air conditioner, it would break more, right? There’d be freon
28:30 spraying around and all sorts of problems, right? So, you know, I’m not trying to be the CEO. You know, that’s
28:37 the big distinction, right, between a search fund and an independent sponsor. I want to be the coach of the CEO. I
28:43 want to be the helper of the CEO. And so, for us, it’s it doesn’t always have to be the CEO, right? We’ve done some
28:49 deals where there’s other management that can stay and we can build around or
28:54 we can kind of reshuffle what seat people are in. And so it’s not that we’re opposed to bringing in outside
29:01 experts if they can be additive to the core management team, but I don’t want to buy something where the owner throws
29:07 the keys at me and says, “Good luck.” Yeah. Right. like I I want to make sure that like there’s some institutional
29:13 knowledge at a very senior level that is going to stay and be part of that growth vision and it sometimes can be like I we
29:21 like we did with this owner for the HVAC business stayed on he stayed on the board over the whole hold period right
29:26 and so he was always in the room yeah he wasn’t the day-to-day but if we had a question about hey what happened 20
29:31 years ago with this client he could answer the question right and that we didn’t lose that that knowledge
29:37 yeah in question what did you structure for that CEO that was there, right? The person that had 2% to start with, like
29:44 what was the structure and the incentive that you put in place to kind of, hey, let’s go home run this thing. So, you know, it definitely was a
29:50 conversation where we said, look, you know, we’re we’re not going to just like give you randomly a chunk of equity, pick some arbitrary number and say, here
29:57 you go. It was like we’ll maintain your strate your your your current salary.
30:02 We’ll give you some bonus, you know, in line with, you know, some hurdles that we all agree on are achievable. And then
30:08 you know in that original LOI the original documentation we had you know a couple hurdles like you know if you get
30:14 it to one and a half times then you know you get an extra 2%. Then it might have been
30:20 you know if you get to 2x you get a you know 3%. Right? We had some hurdles where we’re like we’re going to give you some additional e equity that vests
30:27 based on your essentially helping us hit our internal metrics. And so, you know,
30:32 a I think that incentivized him the right way because it was like, good, if I can help you aim for something, I’m
30:38 getting essentially a free chunk of extra, but also then it kind of mirrored
30:43 like my incentives cuz my deal with like the larger fund was, you know, my my
30:48 carry was not just like a blanket here’s your amount. it was hurdle with the with
30:54 the lead equity where you know if they hit XOIC then you know then I get a you know
31:00 smaller carry if I get more right so we were trying to make sure that everybody was kind of aligned around the same goal
31:06 of like let’s grow this and let’s kind of win together and so you know that that really seemed to to play for him
31:13 because then he knew that it wasn’t like the big bad private equity guys telling him what to do it was like no we’re actually going to go build this thing
31:18 together and and it’ll you hopefully be a better outcome. So, I was kind of curious, you know, I
31:25 mean, we’ve already touched on I think three different industries that you’re in. Tell tell the audience, tell the listeners like I mean what I mean
31:31 outside it’s fractured, right, which can you know I mean what does that mean? Can you kind of what are you looking for in
31:37 these industries you know that you know that that seem you know like you said you did some research on HVAC what
31:43 really drew you to that? So I think a lot of it is it you know it is
31:48 fragmented right it are there a lot of small ones we can buy are there you know
31:53 a lot of older owners that don’t have a plan and we can be part of that plan I
31:60 think it’s also you know is there a product or a service that is being delivered that isn’t like volatile for
32:08 no reason right I mean you know you’re never going to find an industry where it’s like oh yeah every year is the same
32:15 growth, right? And it never changes, right? There’s no impact from the economy or whatever. But like, you know,
32:20 we don’t want we don’t do like consumer, for example, right? Where it’s like, hey, this sweatshirt is hot today and
32:26 it’s not tomorrow and it has nothing to do with the economy, right? It’s just consumer sentiment has changed. There
32:31 are some great sponsors, some I know who are awesome at consumer and I applaud them. I’m like, I don’t understand that,
32:37 right? Because humans don’t behave the way the spreadsheet says, right? They
32:43 don’t they don’t want speculation versus investing, right? Right. You know, and so for us it’s like
32:48 are there you know is there something that’s being delivered that we see some kind of like core amount of demand
32:55 that’s always going to be there and then where we can be helpful in areas that we
33:01 have been able to help before like M&A, right? I’ve closed a lot of deals. I’ve helped source a lot of deals. So, if we
33:09 see an opportunity to do some M&A, and it doesn’t have to be a hundred extra deals per deal, right? You know, even if
33:15 it’s just two add-ons to get to where we think the right size is, that’s great, right? That’s a I know I can add value
33:21 doing that. You know, another area would be sales. We’ve often helped the the
33:26 companies we invest in clarify their sales strategy or hire the right people.
33:33 you know, a lot of times it’s, you know, you don’t have enough sales team or you have the wrong sales team or some
33:39 combination of that, right? So, trying to help think about sales as a function because especially as you get smaller in
33:46 the lower middle market, sometimes it’s just like they don’t really think about it. Not that they don’t do sales, but
33:51 it’s like or it’s the owner himself or herself that are doing a lot of their sales too, right? We call it the backbone. Sales,
33:57 marketing, HR, IT, accounting, and legal. Those are six things most businesses don’t really focus on. It’s
34:03 kind of an afterthought and it’s it’s a way to add some immediate value right to the right size business where they can
34:09 kind of get matured in those areas and that is a way to really start to grow those businesses. So
34:14 yeah 100%. and kind of shifting right you know I know that obviously you’re you’re a
34:20 professor right adjunct at at you know um and I wanted to understand what is
34:26 you know talking with some of the newer students kind of coming out like you
34:31 know we all talk about like the good old days and it wasn’t as saturated and searchers and all this stuff has become
34:36 like this almost like buzzword where do you see the next five years going right
34:41 do you feel like it’s just going to like the bigger guys are just going to continue to cram further further and further down, you know, and make it
34:47 harder and harder for people starting off. How do you what do you what evolutions are you seeing in the space?
34:52 Because I think a lot of our listeners are going to be people that are looking for their first deal or maybe they’re looking for their second and so they’re
34:59 going to be on that kind of, you know, smaller size and I think the the the competition is becoming more and more
35:05 fierce, especially when you’re talking about that three to seven million EBIDA uh range. So, what what are you seeing
35:11 and what are you hearing? So, it’s it’s a great question because I I think you’re right. There is an increasing
35:17 amount of splintering among the private capital world and how you can get deals
35:22 done, right? There are family offices that are doing deals directly themselves. There are me and the other
35:29 independent sponsors now called independent sponsors doing deals the way we do them. There’s the search funds and
35:35 of course there’s all the traditional private equity and venture capital funds, right? you have sort of, you know, four archetypes, let’s say, that
35:43 exist in the space and and actually really if we if we want to try to give them names from my theater world, right?
35:49 I think I called the the PE and VC funds the Broadway headliners, right? So maybe
35:54 we can think of the independent sponsors as the strategic hustlers, the the folks that are kind of putting it all
36:00 together, trying working harder to try to get it done. You know, maybe the family offices are the patrons, the
36:07 passionate patrons, right? the folks that have the money, that love the space, that just want to get a cool show done. And then the search funds, I’d put
36:13 in the category of like overnight success, right? Which they never are, right? Overnight is actually usually
36:19 like a 10-year hall to get to that point, but like they come out of nowhere and it looks like magic and and you
36:25 know, even you mentioned Hamilton earlier, right? Like Lyn Manuel’s first show, In the Heights, was one of those
36:31 where it seemed like it came out of nowhere, but he had started that show in college. I mean it had like a 1015 year
36:38 gestation going through many revisions to get to being an overnight success right and so you know I think to your
36:46 question about the splintering and the increased competition you’re definitely seeing it so even in the last two or
36:52 three years the number of conferences serving the searcher market and the
36:58 independent sponsor market is off the charts I mean I’ve been to nine in the last two years that didn’t even exist
37:04 and So, I’m in a room with a ton of people who are looking to close their
37:09 first deal and are talking to capital partners. And so, you know, certainly I was them once. I hope they’re
37:15 successful. You know, I I want everybody to be successful. Naturally, the flip side, right, is if
37:20 there’s more people trying to do it, some people probably won’t be able to get a deal closed. And so, there
37:26 probably will be a natural kind of constricting of the market that I I think probably will occur. You know, is
37:33 it a cliff? Is it immediate? No, probably not. Right. I don’t know what the what the sort of trajectory looks like, but like just from a supply and
37:40 demand standpoint, right? I think you’re going to see like a shrinking of the people that are trying to do it this way. And that’s where I think there’s
37:47 going to start to be more kind of interesting cross-pollination where okay, you’re a searcher, but like maybe
37:53 you don’t know this industry, so you partner up with a family office who the
37:59 founders of the family office came out of that industry. And so, yeah, it’s sort of a search fund, but maybe the
38:05 family office is more involved than they would be in a normal kind of pure play search fund. Okay, at the end of the
38:11 day, get the deal done, right? Buy the company, grow it. Who cares if it follows the official
38:16 rules of how you’re supposed to do a deal, right? I mean, especially independent sponsor, you know, it’s like
38:21 my view is always, let’s just get the deal done. And I always start every deal with a blank sheet of paper to say like
38:28 what does this business need and then I can go partner with my capital partners
38:34 however that needs to look. And you know sometimes I’m everything. Our dental lab business like I was the chair of the
38:40 board. One of my other investors was the interim CFO. Like one of the other investors helped with the sales team in
38:45 the early days. Like we were very hands-on. I was talking to the CEO every Friday. So we looked much more like a
38:51 typical buyout shop for that deal. our HVAC deal, which arguably was our best exit ever. You know, Summit Park, who I
38:58 mentioned, you know, they had domain knowledge in the industry that I didn’t have. They had done other home services
39:04 deals and so they were like, “We should probably be the lead.” And I’m like, “Yeah, you should. You know, more, right?” And so, you know, they kind of
39:10 filled in some of those gaps that normally I would have done and I was more focused on M&A. There was a small
39:16 working group, me and a couple other people. We were, you know, doing the underwriting, looking at the add-ons, trying to grow the business that way.
39:22 And it worked great, right? like it was a very different model. The share of the management fee and all those things was
39:27 very different in one versus the other. But like at the end of the day, we got the deal done and we grew a great
39:33 business and we sold it. So I can’t say that that was a wrong approach, right? I think it’s sometimes we all get a little
39:40 bit like in our heads about well this is the best way and this is the most economic way, right? Yeah. Like you know
39:47 and so I think it’s more about just go find ways to work together and do good. Yeah. That’s what makes the space fun,
39:52 right? I mean, you know, the commercial real estate side, it’s very one-sizefits-all. Like, there’s not a lot of structures. Lenders don’t get
39:58 flexible. Equity doesn’t really let you get flexible. Versus in this space, it’s about, hey, let’s go structure something
40:03 that’s win-win. And, you know, and we tell people it’s not. Don’t get greedy. Don’t let a deal die over 5%. Right? If
40:09 it’s a good deal, it’s a good deal. And there’s, you know, there’s upside. And so, it’s about getting the deal done, making sure everybody’s getting kind of
40:14 a win structure, but you can get really flexible in a lot of different ways, right? You know, even if you add in just
40:20 sellers getting flexible too, right? From the role to their seller financing to earnouts, all these things are ways
40:27 to make a deal work in different scenarios, right? To make certain people satisfied in certain, you know, areas of
40:33 what they’re trying to accomplish. So, and I think, you know, one thing that I wanted to kind of just just drive home
40:39 for our listeners from this episode is is really that misconception that you have to do all the things, right? You
40:45 have to be the CEO, the CFO, the all. And that’s really what the searcher that’s really the difference between
40:50 searchers and the independent sponsor model, right? The independent sponsor might take less of less of the the
40:57 equity ownership of it. They might not be in the day-to-day. They might just sit on the board. They’re sort of
41:02 strategic advisor. So, I want people to really understand those differences
41:07 because it really makes it really is going to determine which direction you go in this business, right? Do you want
41:13 to buy a company and then sit in that CEO role like you said for the next 10 years potentially and run the whole
41:18 thing a toz or do you want to help enable and grow an internal or external
41:24 CEO and then be their adviser? I think those that’s the major distinction that you know we we do the same thing on the
41:30 the commercial real estate space right people run those properties on our behalf right so it’s the same thing here
41:36 in the M&A space where you have good competent knowledgeable people in that space maybe they’re internal maybe
41:42 they’re external doesn’t really matter but you’re there helping advise them and oversee those things versus doing the
41:47 day-to-day and that’s such a big thing that I want people to hear from this episode that um that it’s that’s
41:53 important right and and I’ll reinforce that because, you know, I I I don’t really want to be the
41:59 CEO, right? I know that’s like the cool thing and you get to be on the cover of Inc. or Entrepreneur, right? And you and
42:06 that’s awesome and I applaud people that are good at that, but like I am much better at the structuring, the finding,
42:13 the buying, the thinking through the asking hard questions. And so I’m happy
42:19 slashpreferring of having someone else do that CEO role. But you know, you have
42:25 to kind of come to that term with yourself. And some people are probably listening to this trying to say like, I
42:30 want to buy this company. I don’t know what I want to do. And for some of them, they should be the CEO, right? Like if you have been in this industry for 5
42:36 years, you know everything. You know how to run these companies. You got contacts in the industry. You got, you know, clients you could go to. Yeah, you
42:43 probably should be the CEO, right? Like you’re the right one to do that. More power to you. That’s just going to be a
42:49 very different experience than what I’m doing. And you know, I I can have a
42:54 couple of different portfolio companies at once. I can be managing different pieces for different ones, right? I can,
42:60 you know, I got to juggle that time carefully and not, you know, have it be too much. But like that’s possible, you
43:05 know, if you’re a searcher, like you can only really do the one, you know, and I mean, maybe you have a little side gig
43:10 or whatever, you own some real estate or, you know, something else. But like I’ve had a couple of conversations actually interestingly recently where
43:17 you know somebody has reached out to me you know saw me on LinkedIn or whatever and said like hey I’m particularly in
43:23 HVAC right they saw that we had this exit people have reached out said oh you know like can you be on the board like I
43:28 want to do this and and a lot of what I talked to them about on that first interaction is like well are you trying
43:33 to buy it and grow it or do you want to go run it right and a lot of them are like I don’t know and I’m like well figure that out first and then come talk
43:40 to me because I can probably help you. But like if you just want to go run it, like I’m actually probably less useful
43:46 for you, right? Because you’re going to use a different kind of financing if it’s going to be all you, you know, you
43:51 might get an SBA loan and put in some of your money and maybe get a couple friends and family and get it done and
43:57 then just go run it and that’s awesome, but I’m I’m not like going to be as helpful to you, right? But if you want
44:03 somebody who’s done it from a private equity standpoint, independent sponsor standpoint, okay, now I can maybe sit on
44:10 a board or ask you questions or whatever. And so, you know, I think that’s one of those that you’re spot on
44:15 that like you you have to decide which one you want to do. And both are great, but they’re very different.
44:20 Yeah, it’s not a right or wrong. So, awesome. Love it. So, with that said, I think we’ll go ahead and move on to our rocket round
44:27 where we ask our guests the same three questions. So, first question, Cory, are you ready? What do you like in your free
44:33 time? In my free time, I have a 10-year-old
44:40 and so he takes a lot of my free time. I’m currently reading him The Hobbit
44:45 because I’m trying to get him to be a geek like me. And we’ve already done Star Wars. I don’t know if you can see
44:51 behind me, I have both an AT-AT and a uh a Star Destroyer. So, you know, we’ve already convinced him about Star Wars
44:57 and and my wife has read him h Harry Potter. So, we’ve convinced him of Harry Potter, but now I’m working on The Lord
45:02 of the Rings. So, uh, he takes up a lot of my time, but I still do theater when I can as well. I thought you were going to tell me
45:08 underwriting deals. Wrong answer, Corey. Love it. Love it. All right. So, next
45:14 question here, Corey. Uh, what is the most memorable moment in your business journey?
45:22 So I think honestly it was the the closing of the very first deal as an
45:32 independent sponsor, right? Like I started the firm, I convinced a couple
45:37 of individual investors to to underwrite Paro as a firm, right? So I had a couple of early partners almost like a search
45:44 fund, right? like they were investing in the idea of Paro as an entity. And so
45:50 that was a different conversation cuz it was like, you know, they were already in my network. They wanted to invest in our future deals. And so it was we were all
45:56 pulling our resources to go build it. But then it was like, I don’t know if we’re going to actually find any deals,
46:02 right? I think we can. I think they’re out there. I don’t actually know. And so
46:07 it was like the day that we closed on that fintech business, that was our first deal. And the day that we actually
46:14 closed the deal and like I was sitting there nervously watching the the the the bank account hitting refresh to make
46:19 sure that their wires came in, you know, closings are really lackluster to begin with.
46:25 And and it’s so it’s so like kind of a um you know misnomer that it’s this big
46:31 exciting thing where you have a a dinner and all this stuff. It’s like no, there’s like one phone call like did you get the paper? Yeah. Yeah. Okay, you’re
46:36 closed. Great. But, you know, I think that was, you know, maybe small in terms of impact and
46:43 and what I actually did that day, but it was like, hey, it proved that the idea worked and then I think everything else
46:49 kind of grew from that. Love it. Love it. And then last question, favorite tool or resource.
46:55 All right. So, I think I’m going to break the trend of saying AI and I’m going to say the phone and the library.
47:03 Old school analog tools, right? Whoa. Whoa. Because what’s a library, man? You got what?
47:10 Cory, tell us what is this thing? I mean, I really do like when I’m in researching a new industry, I’ll go try
47:15 to like check out a book and like read stuff about the industry just because I, you know, I want to sort of see what the
47:21 casual observer of an industry might see. And so, you know, I feel like if you go through GPT or whatever, you’re
47:28 going to get a very focused specific answer. And so I’m always trying to, you know, read more, maybe not always a
47:34 book, but maybe a trade magazine or, you know, something where you’re just kind of getting an overview like the industry
47:39 is washing over you and you’re just kind of seeing like how are people thinking about it? And I I’m, you know, I guess
47:45 old enough you can see the gray hair. Like I like the touchyfey analog version of
47:50 that. Um, and same with the phone, right? Like I told you before, all of our deals have been proprietarily
47:56 sourced and the only way to do that is to talk somebody, right? They’re not going to respond to a cold email.
48:01 They’re not going to respond to a physical mailer. At least not usually. Age group that we’re all targeting, right? It’s usually baby boomers. I
48:07 mean, same thing. We call it going bellyto belly, right? Right. Like getting out there meeting them face to face. We’re usually one of the few guys that actually just show up,
48:14 right? And, you know, try to consummate a deal, right? And and usually when you call them, you know, a lot of times that
48:20 first call, I’m like, “Have you ever thought about selling your business?” Or some version of that question. They’re
48:26 like, “Well, yeah, but I don’t have any time.” Right? Like, and so, you know, it’s like it’s probably something they’ve thought of, but they’ve been so
48:32 busy running the business, they haven’t thought about like, what does legacy mean? How do I get there? My kids don’t
48:37 want it. You know, all of those kinds of things. Yeah. Awesome. Perfect. Love that. All right, Corey. Well, awesome. You
48:43 know, lots of information. We look forward to seeing you in Chicago at our conference coming up in about a month. And so, Corey, how can the listeners get
48:50 a hold of you? So definitely go to our website which is paro & companyspelledout.com
48:56 and you’ll see more info about me. You’ll get to meet my partner in LA. You can um click on various links there or
49:04 feel free to email me. So it’s just corey co r y paro & company.com. Like I
49:10 said earlier, I I like meeting and and interacting with folks in the industry, searchers, independent sponsors. You
49:16 know, I want to try to bring people together because otherwise it’s a lonely game and it’s more fun if we can all
49:22 hang out and, you know, have a coffee or a drink or something. I completely put that in the show notes for the listeners. Cory, thank you very
49:29 much. Yeah, thanks Corey. Really, really appreciated it. Thanks for the time. Thank you. Thank you for listening to the M&A
49:35 Launchpad podcast. If you’ve enjoyed today’s podcast and would like to support us, please leave us a rating and review after you listen. I’m Casey Mchu
49:42 and I look forward to talking with you next week.
