PUTTING IN THE TIME & EFFORT BEFORE THE DEAL (Searchfunder Interview)

SEARCHFUNDER INTERVIEW OF ERIK MIKKELSEN

We spoke with Erik Mikkelsen.  Erik discusses searching in Canada, closing the deal, keeping the seller on-board, and making follow-on acquisitions. 

Please tell us about your search process? 

We had a little different search process. There was no other search fund active in Canada at the time. I had all these plans of talking to divorce attorneys, estate planning companies and local offices of accounting firms. Really, we got the majority of our deal flow from investment banks, the M&A groups at accounting firms (mainly the Big 4 accounting firms) as well as deals from other private equity firms that were too small for them to consider.  

You ultimately sourced your deal through an intermediary? 

Yes, correct. We were meeting with a banker who heard we were interested in the security space. By chance, that banker had a back-to-back meeting with someone else, who was selling a company in our space. They made the connection in real time, and that was how we found our deal. 

Did you have interns?

Yes. We had interns both during the search and during the deal. We used interns primarily who were interning during their school year from MBA programs as well as undergrad. During the search and the deal, we had 3 interns. It worked out really well for us.  

That’s a small number compared to some search funds that are taking on some 20 or 25 interns. 

Wow! We just had 3 and it worked well. 

Were they full-time? 

They were going to school at the same time. So, it was evenings and weekends work. We used them almost exclusively to conduct due diligence and analysis. I know a lot of other search funds use them more for deal sourcing. We did our own deal sourcing. We had the interns conduct due diligence and provide financial analysis and that kind of stuff.

Sounds like a more fulfilling internship? 

Yes. We are very proud of our intern program.   

How did you meet your partner?

He was at Stanford GSB and had heard about the search fund model and was looking into it. Meanwhile, I was in Los Angeles. Although we went to the same school in Canada for undergrad, I didn’t know him there. He went to McKinsey after graduation and a bunch of my friends had been at McKinsey who knew him. So, I had heard the name. Ultimately, a friend at the GSB recommended that we touch base. So, I spent a number of months and a whole bunch of trips to Stanford getting to know the model, getting to know him better, making sure we were aligned and what would be the focus. There were a lot of whiteboard sessions in the basement of the Stanford library. We ultimately decided to pull the trigger & the rest is history.

Tell us about closing the deal. Were there any steps before you took the deal to the investors? 

I had a background in banking and private equity. In my previous role, I had done a lot of sourcing and executing acquisitions myself. So, we did a fair amount of due diligence prior to engaging anyone. From there, the Seller had an intermediary on their side that was an accounting firm. We went through the materials they had put together and started financial due diligence. From there, we put together an LOI.

Our LOI was for an exclusive period. From there, we started talking to a few key investors. We put together a 5 or 6-page screening memo, which was similar to something I had done from my private equity days. We floated that by a whole bunch of investors. There was a lot of interest.

From there, we got accountants involved and the lawyers more involved. We put together a comprehensive memo. We dug into every aspect of the business. We went to management meetings and talked to suppliers. We went to sites and all that good stuff.  

When you first took the deal to the investors what were their main questions?

A lot of it was about concentration within the market. At the time, the company was really focused in Toronto and on one major vertical. There was certainly concerns with the risk associated with that. We had to do analysis around each customer – a very granular customer by customer, site by site and account by account build up. A couple of our investors helped us think through that.  

Other than accountants and lawyers, did you use other professionals on the close? 

No, we did not. We did not have any M&A advisory or anyone on the buy side for us. For negotiating the bank deal, we again relied on some of our investors. Instead of hiring someone externally, I went through all the term sheets and documents with a couple of our key investors, who had significant relevant experience. That really, really helped us with gaining support and helped us save on buy-side fees. 

Did you start talking to investors before or after the LOI was signed? 

I don’t quite recall, but I’m pretty sure it was after.  

You’ve been very successful, having made two acquisitions. Was there any secret sauce you used in your sourcing?  

The fact we were geographically focused was huge. We got almost all of our deal flow from our network. For example, there was a gentleman who runs one of the biggest private equity funds in the country who sent an email out to 200 of his intermediary contacts, “Anything too small for us, send to these guys. They’re great guys. Please help them out if you can.” Those types of networks and connections made all the difference for us. It filled up our calendar talking to all these guys.

The private equity market was different in Canada than the US. At the time, most private equity firms didn’t touch anything south of $10 Million EBITDA, maybe down to $5 Million EBITDA. At the time, US private equity firms weren’t really coming into Canada to do smaller deals either. So, there was this nice niche we were able to get. It was part of our thesis for doing a search fund in the first place in Canada. It really paid off.  

Is that still the case? Or, has the market in Canada changed?

Yes. It’s changed. It’s basically the same as the US at this point. There’s a number of search funds and variations of search funds. There are a lot of Canadian and US private equity firms that are doing deals here. It’s a lot more similar to the US, if not identical at this point.

Switching gears a little bit, do you recall what your first day was like? 

(Chuckles) Yes. I do actually. So, we come in, we were happy to see that there’s no Lamborghini or Ferrari parked outside or that the furniture hadn’t been cleared out of the office. It was really business as usual. We happened to partner with a really great guy, Sidney, who is still with the company. Our whole plan was to be low key. We planned to say that we had made an investment in the company and were going to be operationally involved. Sidney in his typical dry humor fashion comes in and gathers everyone in the company – first thing he’s does. He says, “Hey, Guys: I’ve sold the business to investors. These are your new bosses.” (chuckles) Then, he turns it over to us. Some guy yells from the back, “I need more money.” (laughs) You’re thinking, “Great. Thanks, buddy.” So, it was a pretty memorable day.

We didn’t have offices at the time. There were no open offices in the building. And, we didn’t want to take anyone’s office. For about 2 and a half months, Rob and I worked out of the boardroom. Leaving the room when either of us needed to make a call or do a meeting, while we converted some warehouse space in the back into makeshift offices. One of which I am still in to this day. 

The employees are thinking to themselves, “The Execs are in the warehouse?”

Yeah. Exactly. It was definitely interesting. At the time, it was a small office with 55 employees. Sidney was still signing all of his paychecks for his employees by hand.

We did simple things like putting in a payroll system, like Ceridian. Everyone got the same raise and same bonus each year regardless of performance. Things you’d see at a very scrappy, entrepreneurial organization. There were things we had to obviously do to change that quickly.  

How long did Sidney stay on for? 

Sidney is still with us and is our #1 sales guy. He signed a three-year employment agreement. He said he would be leaving after 3 years, most likely to travel internationally with his wife and two kids. We said, “No problem. Thanks for being transparent about it.” As we approached the 3-year mark, he said, “I don’t know if I want to go travelling. I’m having a pretty good time working with you guys. Would you be open to having me on longer term?” So, we negotiated an employment agreement. He’s still our #1 sales person although some others are catching up.

He’s a key member of our business and is on our Board. I consider him to be one of my best friends. 

That’s an amazing story. What were some of your secrets to not to butt heads with the previous owner?

I think there are some secrets. I know a lot of horror stories. Some of them can be chalked up to bad luck. There are things you can do to help avoid that.

During the due diligence, I look at it as a dating game where you have to see if this is the best fit for you culturally. Do you have the same values? We had conversations every single day with the Seller during the diligence process. Typically, in the evenings, we would get caught up on whatever we were doing that day. I think that was really, really important not only during the diligence process and deal closing, but afterwards as well. We had this rapport built up. We were open and honest with each other about what we needed to have happen and what was in line for both of us. I have to give my business partner Rob a lot of the credit here, I think that made all the difference.   

We walked away from deals where we felt there wasn’t a good cultural fit. We thought we wouldn’t get along or something weird was going on. This occurred during the initial search and in considering subsequent acquisitions afterwards. We walked away from deals where we didn’t have that warm, fuzzy feeling.  

So, there is a lot of time and effort just like any relationship that you can put in prior to doing the deal. We got really lucky with a great guy we partnered with.  

What were the main operational changes (CRM, accounting) that drove the most value? 

Putting systems in place is one thing. We didn’t have much of an external sales team or marketing engine. We had a basic website. We looked at building a sales team, building a commission structure that made sense for them, building processes and procedures on an operational level, and creating a lot of manuals and documentation of processes on anything from cybersecurity to insurance to health and safety. We developed these gradually.

Sidney was your typical entrepreneur, who got everything done -- all from sticky notes all over his office and from memory. It was crazy that he was able to do it, but obviously it’s not a way we could scale a company.

We implemented proper reviews and processes. Then, we went in and figured out which employees in every group had been working really hard and doing a good job and which ones needed some improvement. In a lot of cases, for the ones who needed improvement, we were able to give some coaching and some transparency of what was expected from them. A lot of them rose to the occasion. A couple, who are still with us, have been promoted several times and are doing really well. For a couple of the other ones that we sorted out, they inevitably left. We also found some really good new hires. For our example, we brought in a very strong CFO, who helped lead subsequent acquisitions and is a key member of our senior management team. 

Anything you would have done differently that you now know, for example, rushing changes?

Not really. We did everything we could do to learn the business as fast as possible and started making changes pretty quickly. We were also mindful of not wanting to stir the pot too much. I think having a Seller like Sidney that was very supportive of us coming in and was very open with us being a team and wanting to progress as a team helped. We jumped right into it.  

Looking back 6 years, I wouldn’t have done much differently. We learned a lot from the mistakes we made along the way and it’s made us that much stronger.  

Did you have industry expertise on your Board? 

Great question. We do have industry expertise on our Board through Martin Steber of Relay Investments. Martin had done investments in the security industry previously on the alarm side. That was very helpful not only in terms of what he had seen, but also in putting us in touch with other people in the industry. In terms of financial metrics, he put us in touch with the CFO of another security firm that he was on the Board of. That’s been really helpful.

We did a recap in###-###-#### During that recap, we brought in a strategic private equity firm from New York named Egis. We put Bill Polk on the Board from Egis. They only invest in the security space. They have been involved with Alarm.com, WestTech and other well-known security industry companies. That was instrumental for us in launching our business in the US, which we’ve done successfully. It was also instrumental in doing another acquisition in the US and helping us get very attractive financing. We bought Stealth Monitoring in Dallas last year. Having strategic investors with industry knowledge on your Board can be very important and provide a lot of value.  

Looking into the future, where do you see yourself in 5 years?

That’s TBD. We see so much potential in our space. With new advancements in artificial intelligence, machine learning and computer vision we’re moving more into business intelligence than just video monitoring for security purposes. We feel someone in our industry will have the opportunity to create a $1 billion enterprise. Right now, we feel it is ours to lose. For the foreseeable future, I plan to continue doing what we are doing, continue finding great people to bring onboard, and continue to grow organically. Over time, we may look to do more acquisitions as well.  

For your follow-on acquisitions, do you typically go back to your original search fund investors?

 Yes. Typically, we’ve gone back to them all. Then, we’ve also tried to make a little bit of room for strategic investors. When we did our last acquisition in Dallas, the majority of the capital was through our existing investors. The entire round could have been filled with our existing investors, but we chose to take the opportunity to get a bit of money from some strategics as well.  

For the add-on acquisition, were the terms similar to the search fund terms or more like private equity?

They were similar to, but a little different from, our search funds terms.

This will be very helpful for searchers, especially those interested in the security space. Perhaps, you’ll be asked to sit on a searcher’s Board some day?

I actually was just asked to join an advisory board for a searcher. It will be a monthly call to ensure he’s thinking things properly and provide support and guidance. I also had put together an advisory board when I was searching consisting of some seasoned private equity people and smart people I knew. At the time, I didn’t know many other searchers. Once I have liquidity I plan on investing in search funds.

Thanks so much for your time.   

Summary of Insights

Here are a few of the key takeaways from our discussion with Erik:

• • Sourcing your deal through an intermediary can be successful.
• • Working with the seller is very much a “dating game,” where you are building and working on the relationship day by day.
• • Spend time and effort on identifying whether there is a good cultural fit between you and the seller’s company.
• • Your Board can be a great resource for you.