Mark Sinatra Transcript

Thanks for joining Mark, I’ve been excited to have you here just because you have so much experience running a company. And now you’re investing in search funds, but I really want to hear about earlier background, how did you get into search funds and then why did you decide to launch one and then tell us about the company you acquired and the experience you had there.

Thank you, Alex. It’s great to be with you here today. Appreciate the opportunity. So just by way of background, I first got into search funds shortly after graduating from Wharton’s MBA program. And this is back in really the 2006, 2007 timeframe when search funds, at least at Wharton was not a well known concept at all. I heard about it from a classmate of mine who was researching the search fund concept, and when I first heard about it, it was one of those just inspiring moments. I was like, “Wow, this is what I was looking for. I just didn’t know it’s called a search fund because through my time and experiences at business school and really reflecting on what I was passionate about and what I thought I had a strong aptitude for, I was determined that ultimately my career I wanted to run a business. And the search fund model really appealed to me because I saw it as the most direct path for me to get to where I wanted to go.

So in my second year at business school, I did a lot of research to understand the search fund model, understand if it was the right path for me, if so what would be the best approach? If I should launch a traditional search or, a self-funded search or any other path, and I determined that the traditional search path was the best path for me, given my risk tolerance at the time and my goals. And I decided to launch that with a classmate of mine, shortly after graduation. It was about five or six months after we graduated, is when we decided to launch the search. And I was able to get through the initial fundraise in about a three to four month timeframe, and officially launched a search January of 2007 and spent about a year and a half scouring the country, turning over rocks and to find the best deals possible. I based my search out in New York, my business partner was based in Minneapolis, and it worked well from the perspective of having some coverage of different regions of the country.

But it was a challenge. It’s really such a challenging part of the process. And the challenges is that it’s a binary outcome, you either buy a company or you don’t. And along the way, you’ve got to figure out, are you on the right path to success? If it’s a Friday week eight of your search, 5:00 and you ask yourself, have you done the right things the right way, that week, to lead you up the mountain? You need to have a good sense and a good compass of what the answer is. And sometimes it’s hard to do that if you’re a solo searcher. And it’s sometimes hard to do that if you’re a team in different locations. But we were on Skype a ton, every day just trying to collaborate, get ourselves psyched up and give ourselves the confidence to continue the grind to ultimately acquire a business.

But the search process proved to ultimately be successful in the sense that we closed on an acquisition, like I said, 18 months in. It was an HR outsourcing business. So think of ADP, Paychex. So payroll processing, health insurance HR. Checked a lot of the boxes that traditional search funds like to see recurring revenue, scalability, fragmentation, industry growth. I ended up sourcing a deal, actually, through a, essentially a river guide slash industry M&A broker that I had cold called, I found her information through Google and introduced myself one day, had to explain the search fund model, thought the call well, didn’t hear from her for five months until January of 2008. I get a call from her and said, “Hey, listen, I know you haven’t heard from me, but I found the perfect deal for you.”

And what that said to me was, “Well, that’s great.” It’s hard to really read into things if you don’t hear back from people. I mean, there could be a lot of reasons for that. But it was clear that that first call really stuck in her mind that, “Okay, here’s Mark. He’s interested in the HR outsourcing space for various reasons, but he’s looking for a particular situation. He’s not just looking for any company that has one to five million in cash flow. He’s looking for a situation that fits that size range, but where the owner is really looking to retire, doesn’t have succession plan.” And so those sound bites stuck in her mind. And thankfully, I was still top of mind for her five months later when she came across that opportunity.

And so we ended up pursuing the deal, obviously, I ended up closing on it. The business was based in Southern Oklahoma. So I find myself on a plane from New York to Dallas and then driving up two hours north to Southern Oklahoma to run this business. And it was just an incredible journey, overall, to be honest. I mean, it was a nine year journey of running this company, a lot of lows, a lot of highs and overall extremely, extremely worthy experience for me to go through.

The beginning stage was the most challenging by far. The business in some respects, I mean, it was a good business, it was a great lifestyle business. For us to really turn it into a platform for growth, we felt that we had to make some pretty significant changes to the business. Most notably moving the company from Oklahoma to Dallas. You would think on the surface, only two hours away, but very different. And as a result, to that move, we had significant employee turnover. I think three years into the deal, I could literally count on one hand, the number of employees that were still with the business versus when we bought it. So I’m talking well into 80, 85% turnover, which is extremely abnormal and disruptive.

And that was the biggest challenge, was it’s a business service company. It’s not a software business. We had a technology solution that we licensed, but it wasn’t our platform. At the end of the day, the secret sauce of the business was in the people. And so when you lose that, how do you recreate that? How do you keep the business stabilized? And how do you grow it? And in short, that proved to be, in the earlier days, just the absolute biggest challenge of the business. When we moved to Dallas, we rehired for, of course, all of those positions. And no one that I know of bats 1000 when they make hiring decisions, so there were some roles that we had to then rehire for just to get the right person in the right seat.

But through that whole process, it unfortunately cost some client disruption. Clients prefer consistency, stability of execution, particularly in the HR business, when you’re processing payroll, when you’re administering benefits. Having that flawless consistent execution and commitment to service is incredibly key. They like calling the same person every other week to coordinate with their payroll. And so when that person changes that can sometimes be disruption, if that consistency is not at that top tier 100% level.

So unfortunately for us, because of those disruptions, we had some client retention issues, and it culminated with one of our largest clients, about 30% of our business leaving. And that was, I mean, almost three years in the deal. So I found myself with a situation, with a business that we felt the changes we made, for the most part were actually good changes. In the long run, we were going to move the company forward. Moving the company to Dallas, we felt gave us access to certainly a larger sales market to credibly sell into because we were based in Dallas. The buy local mentality, buy local serve local mentality and gave us access to a larger pool of talent that we could hire in.

And then there were also some other changes. We changed our technology platform and some of our other products. And we felt like, again, most of these were really good net positive changes. But it was frustrating to see that we hadn’t seen the positive results from those changes yet. The leading indicators of the business were up. Our pipeline was at record levels, our net promoter scores were increasing. But receiving that termination from our largest client was incredibly, incredibly painful. So we had to restructure the business. We had to right size our cost structure. And my business partner and the board, they amicably decided to go in different directions, really leaving me to run the business solo. Definitely not what we had drafted in our search fund playbook and our PPM, but I knew that there was a way out. I knew that there was a way to really get out of this hole, and to grow the business the way that we had initially planned. And the leading indicators gave me the confidence that we were moving in the right direction.

And so thankfully, over the next six years, we were able to reap the benefits of some of those changes. Of course, hiring fantastic people and putting them in situations to excel and thrive, giving them resources that they needed to do their jobs at the highest level they can on a daily basis, and then inspiring them with a vision to believe in that purpose, that what they’re doing is making such a meaningful impact to our business, to our clients, that was ultimately a key part of the winning formula. Was just getting the right team in place at all levels.

And it really started to click, like I said, our organic growth, and our client retention increased materially to the point where our, at our low point, I’ll give you some numbers, we were processing payroll at our absolute lowest point for about 1900 client employees. That’s a big unit metric in our industry. We call them worksite employees, so client employees. And when we sold the business, we were processing for over 12,000 client employees. And about 85% of that was organic growth, about 15% was, I did some small tuck ins towards the end, which is great. It’s actually very creative. I think the average synergized multiple was around two and a half times EBITDA. So it was nice to get that little boost towards the last year or two.

But like I said, I mean, the deal and the journey was really a tale of just two deals. Where like I said, the first couple of years, was a significant struggle, and the last six years were years of rewarding growth. Still had challenges, of course. I mean, it wasn’t all roses and everything, but I mean, it was filled, someone used to tell me when you have sales, they can fix a lot of problems. And so we were just selling a ton and having fun. And so like I said, thankfully, we got the company to that 12,000 client employee mark in 2017, when we felt it made sense to see what the market had to bring to bear.

And after all those years of building it, we went through a full auction process, hired a banker, and was able to find a good partner, our largest privately-held competitor at the time, like two private equity firms. And they were doing a structured roll up of the industry and found us to be an attractive asset to be part of that. So thankfully, we consummated that deal towards the end of 2017 and I actually stayed on with that business through their subsequent sale, which was about a year later, to Paychex, and I stayed about another six months to assist with the integration and all of those efforts, and fully exited about 14 months ago, the summer of 2019.

So from end to end, soup to nuts, it was a full journey, incredibly thankful to the support that my investors and board gave me, particularly, I mean, at least names that you would recognize from the search fund orbit, Dave Carver and Rich Kelley and the whole team over at Search Fund Partners was really, really supportive to me, when we were at that low point and trying to get out of it. Having that support gave me the confidence that, okay, let’s turn this thing up and get the engine revving and really try to grow it and six years later, we were able to get the outcome that we did.

Thinking back to the time where you had 85% turnover, and of course not betting 1000, you had to rehire certain positions. Did you notice any errors or mistakes or oversights you had in some of those hires that you had to rehire and lessons learned along the way?

Yeah, we did. In fact, the biggest lesson learned is we place such an emphasis on hiring folks that had their respective expertise in, whether it’s in HR, or payroll or insurance. But perhaps a few of them came from larger company environments that were incredibly structured. And in our business, we were at the size where we were scaling and when you’re growing, when you’re scaling most folks are in roles where you’ve got to be agile, you’ve got to wear multiple hats, you’ve got to work at an incredibly fast pace. And what we found was a lot of the folks who came from those larger company environments, we just weren’t a fit for them at the end of the day. And they weren’t able to make that transition to the work environment that we had.

Additionally, we’re service company too. So there were some folks that we hired who maybe didn’t have service in the forefront of their mind, but were credibly, credibly knowledgeable again about their respective discipline within the HR field, and had done a great job in their prior roles, but maybe it was an internal role where they were the HR person for a company, but it wasn’t a client service environment.

So when we made that shift, in terms of understanding, okay, here’s where we went wrong, what do we do about it? One thing we used was a tool called predictive index that helped us better identifying A players for each of the key roles we had in our business. Of course, it wasn’t all the sole data point that we used, but it was just a data point that we used as part of our overall talent evaluation process. And we ultimately rolled it out to help improve team dynamics and communication within our business. But that’s just one example of a corrective action or solution that we took to refine, tweak and ultimately increase our hiring competency and accuracy.

And on the other side, what hires did you make where they were home run hire, they were great on your team. Was there something about them that you noticed a pattern of?

One of the unlocking hires, so to speak that we made was an individual who we actually hired in as a sales rep which was great, but she didn’t necessarily have a traditional sales background, she was a former business owner, had some great industry expertise, and was looking for an opportunity to get back into the industry. And so the timing just worked out where we had a sales position open. I mean, she did a great job in that sales position. But I knew early on, with her knowledge and her energy and her work ethic, and her ability to, at the end of the day, just get the job done, and get the job done correctly, within a fairly quick timeframe, I knew that she had a lot of potential.

So she ultimately got promoted to different roles within the organization. Ultimately, towards the end of overseeing most of the operation on a day-to-day basis. That really was unlocking because, the last couple of years, it allowed me to actually work on the business strategically, focus on those inorganic growth opportunities, those add on acquisitions, to help grow the business. And so if I look at what are those attributes and behaviors, one that comes to mind is this having a very high natural inclination towards action orientation. Someone that is very willing and looks to roll up his or her sleeves to grind it out to get the job done, day in and day out, to do whatever it takes and whatever’s necessary, really, is one quality that she had, but also, certainly many others within our company that really helped us get to the next level and to grow. Because growth takes a heck of a lot of work. It really does. And being able to have a team that’s willing to put the time in and do the things necessary to grow the business is obviously incredibly critical.

And it’s fairly common for search funders to go into an acquisition and trying to get a sense of, okay, the team that exists at the company, and is this a team that can scale the company for growth? Maybe yes, maybe no. Sometimes the answer’s usually in between. That’s really one of the most critical things, is team assessment for the culture that you want to build and being able to refine, and to tweak that team as necessary to take the company to further heights, is one of the most critical things that a CEO needs to do.

And thinking about some of those hires that came from larger HR service companies, do you think there was some element of timing, where as your company grew further, perhaps that employee would have been a really good fit at a larger version of your company? But at the earlier version you aren’t necessarily looking for that type of person. So when you were hiring, did you look at where is this person along in their career and their timeline? And how does that timeline affect or align with ours?

That’s a great point. I mean, I think, absolutely, there were some folks who we weren’t a fit for perhaps because we were in an earlier stage of the company lifecycle, that didn’t necessarily align with where they were and where they wanted to take their career. So the best thing you can do as an employer is say, “Okay, well is there an opportunity here that fits well?” But if there’s not, then you really owe it to that team member to then find whatever it is that opportunity is and to give that person the chance to find an opportunity somewhere else that’s as much more aligned with their skill sets and what they’re passionate about. It really is tough to transition into a company that’s growing and scaling and may not, for example, may not have the structure over the organization that other more established companies have. And that can be very frustrating, and rightfully so, to some folks. So I think you make a great point. I mean, it’s really about matching and aligning skill sets in the interest of that team member to where you’re at, and hopefully being able to do so.

And then losing your largest customer. How large was that customer as a percent of your revenue?

About 30%.

Obviously no one prepares for losing nearly a third of your revenue. Did you know going into the business that there was that concentration and you had some element where you were mentally preparing for perhaps losing that customer? Or how did you handle that loss and recover?

The customer was actually only about 10 to 12%, at the time of the acquisition, but had grown pretty significantly in the first couple of years post acquisition. So I grew a lot and they grew a lot through acquisition. When we started to understand that it could be a risk about certainly, I would say, a year or so into the deal, and so when you do that, you got to be all over it, obviously, and build a relationship, ensure that the service level that it should be and also grow out of it. I mean, diversify that risk, sell more accounts. And I think that our challenge was that we were making other changes to the business that made it hard to excel on all of those fronts at that time.

But I will tell you, about a month after losing that client, I had a proposal meeting for a company that ultimately proved to be one of our largest accounts in a couple of years, two years later went public, and proved to be a much more profitable and a customer for us. Of course with our growth, we ultimately replaced that client and grew much more beyond that. But it was extremely painful to deal with at that time, because you’ve got to right size your P&L to ensure that you can operate and get through that downturn to make it to the other side.

That was really the first thing that I thought of when we had that loss was, “Okay, well, what do we need to do financially to get through it? And what’s in our pipeline that we can close immediately? And let’s just get, if we haven’t, push down on the pedal as hard as we can on sales. Let’s make sure that we do that immediately.” So like I said, ultimately, it was a hole that we got out of successfully, but it was still painful.

And then as you went through the sale process for the company, and you had the option to stay on with the acquirer, how did you think through whether you wanted to stay there or leave and relax for a little while or do something else? How did you think through that part?

It was interesting, because the acquirer was just great to work with. I got along really well with the key executive senior leadership team and everyone I interacted with at that business. I mean, it was just a really good fit. I just felt like from the very beginning, we all had a really good trusting relationship. And truth be told, I think we were a good strategic fit for what they were trying to do. About six months after the acquisition, I was given an opportunity to help lead an effort to actually restructure the parent company. We were one of, I think, five or so acquisitions that they did across the country. And there was an opportunity to essentially structure the entire company into different regions. So each region would have a GM that would essentially manage the operations and have a regional P&L. And so we had to figure out, how’s that all going to work? What departments are going to be appointed to the regions and it was really, I think, an interesting idea. It made a lot of sense given their explosive growth.

So I was given a great opportunity to really help lead that effort. And so I became their first GM slash regional president for the Western half of the country. And so that was about, essentially eight months or so, after I sold the business. So the span of control was about, I would say, give or take five times larger than the company that I ran. So I mean, it was a really, I think, a great opportunity for me and my career. So I helped, like I said, spearhead that effort. And not too long after I was getting into the role and helping to roll out the initiatives, they actually sold to Paychex.

And there was some uncertainly from my perspective as to what that was all, of course, going to mean. But I took it as a sign that it wasn’t lost on me that I’d spent nine years prior to the sale, just really, really just grinding it out and building the company to where it was. I really felt that I needed to take a break, and just recalibrate. And so I just took the opportunity to do that. And I mean, it was really just more of anything, a personal decision to take some time off, reflect and recalibrate.

So from last year, when you took the time off, and you left and you’ve been relaxing and recalibrating and thinking about what you’re going to do next, how have you thought through this next stage that you’re working on?

I think as it relates to search funds, the one thing that was cleared my mind was that I wanted to get involved in the search fund community again. I didn’t know how that would take form. But very simply, I just really enjoy talking to searchers and brainstorming on industries, reviewing deals. I mean, it’s just, frankly, it’s just a lot of fun. And so I was like, well, becoming an investor in search funds would obviously be a natural path. It’s common for some former operators to do that in some form or fashion. And so I linked up with a friend of mine, who I met in the early days, when I was at Wharton during the orientation before first year and became really good friends. And so we decided to link up as it relates to, he’s got his own search fund journey and path. So we decided to partner up and invest in search funds. And it’s been great.

It’s exciting to talk to folks that are either whatever stage they’re in, whether it’s they’re thinking about it, or they’re raising for their first round of capital, or they’re searching right now, I haven’t spent a lot of time working with operators yet, because we’re just not out there, we just got started, really about a year ago. But it really goes back to just how can I be intentional about where I want to spend my time? And I want to spend my time in an area that felt like I have something to give, I mean, I had a long journey, made some mistakes, had some successes, learned from mistakes. If I can help flatten the curve for future searchers, then I felt like that was a really good way for me to give back in again, something that I enjoy and something that I’m passionate about.

Is there a common piece of advice you give searchers who are thinking through the operation stage of a company and knowing that you’ve had lots of ups and downs and moved your company, lost a big customer, a partner and all these other crises, but have managed to pull out of it and have a good exit. Is there something that you pass on to searchers to help them think through that operating stage?

There’s quite a bit. I think, if I could boil it down into a few lessons, it goes without saying but like I said earlier, one of the most important decisions you can make as CEO, of course, is building that winning team. And you’ve got to understand, at some point early in the deal, what does that winning team look like for you and for that company? So if you want to grow organically 20 to 30% a year, that’s great. If the company that you’re buying, maybe was a little bit more steady, growing say 10% a year, and now you want to ratchet it up, okay, so is the team that got you to here, is that the team that’s going to take you to 20 to 30% [kegger 00:34:33]? Or do you have to tweak and modify? Figuring out what that winning formula looks like for you is really critical.

At the same time, going back to sales, understanding what I would call your, I guess, your predictable revenue formula is. So if you have that goal, of say 20 to 30% growth a year, what does that look like in terms of the types of activities, sales activities, the frequency of those activities? What does that recipe look like for your business, where you will have high confidence that at the end of the day, if you do enough of those things, and your team doesn’t have those things, you’re going to be able to ultimately hit your 20 to 30% growth target? It’s actually similar to, in some ways to the search process, where you’ve got this objective of one company, well, how many LOIs do you think you’re going to have to put out to buy one company to get those, say it’s, I don’t know, 10, out of those 10 LOIs, how many indications do you need to put out? How many NDAs?

So you’re just going to work your way up through the activity funnel and understand… And you basically boil it down to what you think you need to do day in and day out, to ultimately drive those metrics through the funnel to lead you to success. So very similar, if you can figure that out in your business, that’s going to be obviously a huge unlocking move, to help you achieve your growth plan.

And then I think, lastly, and it goes with building that winning team. But it’s also investing in the business to build a winning culture. And particularly if you’re buying a service, business services or any type of service business. But I think it’s true for really any type of business. But the CEO really sets the pulse and sets the tone for employee engagement, for culture. It’s not something that you can nor should you delegate. So you’re going to be the steward of the culture that you want to create. One of the leadership programs I went through, they would always say leaders get the company that they deserve.

So with that said, I think it’s really, sometimes it’s easy to overlook that, the culture piece. Because when you get into a business, it’s so exciting, because well, it’s an amazing rush, so many opportunities, so many projects, so many things to tackle. You’ve got to be first of all laser-focused on what’s really important, versus what’s not important. Do a first cut of that and then do it again to really challenge yourself as to what is really, really important for you to focus on. But of those things, you can’t lose sight of the fact that building that culture, being that servant leader is such a critical ingredient to building employee engagement and trust and followership. Everyone is watching what you do in those first, I mean at all points, but most particularly, in those first few months after you buy the business. They’re listening to what you’re saying, they’re watching what you do, they’re watching what you don’t do. So if there’s one thing I can impart is just be intentional about the culture you want to build and own it.

I like it. What class would you teach in college, if it could be about any subject you wanted?

I gave a guest lecture the other day on search funds to an undergrad class. And so I don’t know, maybe this is a cop out answer. But I mean, at some point, I’d love to teach a class on search funds, of course. But I also think, what we just talked about, teaching a class on driving employee engagement, building an intentional culture CEO, I think is particularly important. I don’t know to what degree that’s being taught today. My guess is perhaps that there’s an opportunity to really instill some lessons in the classroom on those topics across MBA and undergrad programs. It’s a topic I’m really, you can tell passionate about and one that I know for myself, I wish I had more exposure to earlier in my career.

Excellent. What’s the belief you used to hold pretty strongly that you’ve changed your mind on?

The process to buy a business is so rigorous and intense. And ultimately, the results are correlated based on your individual effort. And that’s really true for a lot in someone’s life, at that point. You’re rewarded based on your efforts. And so it’s just a cycle that self perpetuates. But when you start to get into running a business, that can actually be a little counterintuitive because you’ll then start to figure out, okay, well, the more than I do, as an individual, I’ve got a whole team. So if I’m overstepping, and perhaps even over executing, but in my mind is something that I’m used to because, hey, I just worked really hard for two years to find a company to buy. But then going from that to then saying, “Okay, well, now I’ve got to switch and put on my hat or I need to actually build a team and work with them and to inspire them to achieve our collective vision.” That’s very different than being that executer.

And so I don’t know how to really sum it up, but it’s going from a knower to a learner. So mentally, when you’re in that CEO role, understand that there’s a lot to learn and being open to it, being open to feedback and advice and guidance, I think is key. For me it was, I think, an inflection point for me in my own development.

What’s the best business you’ve ever seen?

It was a good business I saw the other day. It’s an actuarial business for health insurance called Milliman. And actually based in Omaha. They’ve got a very unique methodology in terms of how they assess risk in health insurance plans. And they’re able to basically analyze, they’ve got access to different data sets. And I don’t even know if it’s exclusive access, but I think they’re the only company that I’ve seen that has employed this unique methodology and they’re able to patch it up into a technology platform and have, I think, some pretty decent pricing power for their consumers. It was unique, because obviously, it’s recurring revenue, it’s providing value, but it’s also I don’t know if I’ve ever seen that company even match what they’re doing. So I thought it was really interesting.

That is pretty interesting. Thank you so much for sharing your time with us and explaining your journey through your company and investing in search funds and all the lessons along the way. I really appreciate sharing your time today.

Yeah, I enjoyed it. Thanks, Alex. I appreciate the opportunity and we’ll talk soon.

Yeah, great to have you. Talk soon.

Thanks.

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