Lower Middle Market Private Equity Explained: Founder Exits and Control

We say lower middle market is anything from $5 to about $50 million in EBITDA.

JJ Barto is a partner at Broadwing Capital, a Dallas-based lower middle market private equity firm focused on building durable businesses alongside management teams. With more than 20 years of experience investing in privately held companies, he brings an operator-first mindset to private equity, emphasizing discipline, partnership, and long-term value creation. JJ explains how execution, culture, and operational clarity separate great investments from average ones.

How do you prepare somebody who's about to exit?

One of the first questions people ask is, who can I hire and how much money can I spend? The big new facility that I wanted to buy, can I buy it now?

There's always these horror stories of first-time founders who thought they were going to have this exit and they ended up walking away because the deal wasn't good for them.

It's more fun to tell a bad news story at a cocktail party than it is to tell a good news story.

What does that mean when— and I understand lower middle market is like, was it $10 to $100 million? Like, what is that?

On who you ask.

Yeah, it depends kind of on who you ask. We say lower middle market is anything from $5 to about $50 million in EBITDA.

And then are you looking— because if you're PE, are you looking for more speculative or is that more the VC world? Like, what type of companies are you looking for to invest in?

Private equity generally has lots of different areas of focus. We specifically focus on first-time institutional capital. These are founders or family sellers. And so someone who's never gone through a transaction, these are the American dream stories, right? These are someone who's built a plumbing company or a roofing company or a facility services company. And it started maybe with their mother and father, or maybe they started it. They've run it for 30 years and they're looking for an exit. Private equity can focus on companies that are not stable or are in distress, just like real estate, right? You can have distressed real estate or really performing real estate. What we specifically focus on is stable-to-growing companies looking for their first kind of institutional capital transaction. And it's incredibly rewarding work, right? We get to work with founders and sellers who have this preconception of private equity. It's, you know, it's a lot of really sharp folks, but they got really sharp elbows. That's a perception that's out there a lot. We, we work really hard to be very sharp folks with really, really soft elbows.

So, so like you brought up like plumbing, like when you buy it, when you seek out a plumbing firm, are you then pooling together and merging them into one kind of super plumber or do you keep them the independent acquisition it is?

Generally, we like to go to market with a platform that we can build upon. So we'll grow through new, new locations, greenfield locations, new office, or we'll, we'll acquire, we'll make a bolt-on or a tuck-in acquisition. But it has to be the right kind of acquisition. Our group tends to focus on commercial services, so we're not as interested in residential plumbing or, say, residential HVAC, which has been really hot. Over the past decade, but, but B2B services, commercial services. So if you buy a commercial plumbing or mechanical company that redid the cotton bowl bathrooms, right, that's not going to be suitable to combine with a company that comes to your house when there's a septic problem or whatever.

And then because I feel like there's been a lot of— and this is all anecdotal, I can't reference anything. But I feel like there's been a lot of bad press when it comes to PE firms gobbling up some of these firms because— and maybe it's just from the small business standpoint where it's like if you're a small business owner and all of a sudden your competition is now owned by a PE firm and now they have all the money in the world to dominate you, it just feels like— is that— am I making that up or is that a real dialogue that's out there?

It's more fun to tell a bad news story at a cocktail party than it is to tell a good news story. That's part of what's going on. And there are folks who are more aggressive in the way they take control interest than others. Some groups make an acquisition and listen for 6 months and don't do anything. Other groups have a strategy that's well-drawn, and they get in there, and they make an acquisition, and they change a lot very quickly. There's a balance in there. Of listening to the management team and then understanding the business that's been acquired and then figuring out how you work together to grow that.

Yeah, because it feels like there's always these horror stories of, you know, first-time founders who thought they were going to have this exit and then, you know, they end up walking away because the deal they struck just wasn't good for them. And again, that's anecdotal.

I don't know. It could be hard, right? If you're the— if you're the boss and you've been the boss for 30 years and all of a sudden you have another partner, and so you're now no longer the sole captain and commander of the ship, but you've got to lead by committee. Right. And that can be hard for folks. Right. There's a loss of control and a loss of identity. Yeah.

I look at it— you use the cocktail party analogy. I talk about the plane crash. You hear on the nightly news about the plane crash and it's the center of attention. You don't hear about the million flights that land landed safely. Recently, Red Lobster was acquired by private equity and ended up being bankrupted, and they were a firm that focused on financial engineering, and they sold off the real estate and did a whole lot of things. And there were a lot of problems underlying Red Lobster before they were acquired by private equity. But I actually saw that being circulated around in social media as an example of how bad private equity is, and it's one bad acquisition that wasn't well done. I transacted a firm, a 40-year-old owner who'd started a business in college and grew it into a $30 million enterprise. And he felt like he'd grown it as far as he could grow it. And he wasn't getting to go home and see his wife and kids at night and have dinner. And he didn't have middle management. A group, a private equity group out of Chicago who was in his industry doing a roll-up acquired him. Used him as a platform acquisition. They give him Fridays off. He doesn't have to be in operations anymore. He gets to go watch his kids play football. He put a lot of money in his bank account. He still owns part of the company. I don't know if you guys do an equity roll strategy as part of it or not, or you do a full acquisition. So some transactions, the owner will sell a portion of their earnings, typically a majority, and they'll keep a minority. In some cases, they'll, you know, the private equity will acquire full control. But he gets the proverbial second bite at the apple. So 5 years from now, 7 years from now, when there's another exit, he has another piece that gets monetized. In the meantime, he's in a better position operating in the company. And JJ's right, you just don't really hear about that. What is there to say about that? It was a successful— so I see a lot of really good things happen. But there are the cases where things don't work out. I do think the dynamic you hit on is really important and not really really considered as a variable. I work with founder-owner-operators who've never sold the business before. Their entire identity is wrapped up in that business. Imagine running your business, Harper Belmont, for another 20 years and growing it. You got 100 employees and it's your business. And you got the truck out there that has Harper Belmont plates on it. And, and, you know, that's what you're known for. And you sell your business to a very nice, soft-elbowed private equity firm. It's not your business anymore.

But how many commas?

Well, that's true.

That alleviates— Because the other thing is, I can be bought.

Yeah. That alleviates a lot of the pain. What I will say is I sold my wealth management firm 12, 15 years ago to a private equity-backed roll-up group, and I was miserable. And I look back on it now, and I was really— I just thought they were terrible at the time. I just felt like, man, they're not doing things the way I did. They're changing the rules. They're doing this. They're doing that. And I left after a year. I could have stayed on. They weren't mistreating me. But my ego and my investment in this is my business and I control it, I wasn't prepared for that transition. I cashed the check, right? But I wasn't prepared for that.

That's right. And that's what people focus on. They focus on the payment. They don't focus on the transition in lifestyle. So, I had a friend tell me last week, he said, I sold my business, and I had a consulting agreement for a year after that. I went into work the next day after we sold it. And over the next week, I realized my ideas weren't as good, my jokes weren't as funny, and no one wanted to hear about my kids. Because I was no longer the boss. This is my friend who told me. And he had to go through that adjustment period, where he was still the guy who built the business. But at the end of the day, he was no longer the one person controlling where the paychecks were getting cut. And so there's a shift and he wasn't prepared for it either.

No, I think most people aren't. I say that it's anecdotal, but I think most business owners, particularly founder-owner operators, aren't ready for that shift.

But I think just that— I know we're just being goofy right now, but like the going into work the next day as a consultant, not as the owner boss, and realizing that you are no longer the top dog. And again, everything that you're saying is not gold. And it's like, how do you prepare somebody before that? How do you prepare somebody who's about to exit or about, you know, in your business looking to exit? It's like, is there a crash course on humility and like separating yourself from your business?

Well, part of it is just talking about it. Part of it is we have a— we do an exercise we call founder intention planning. We're during diligence, we're not just learning about the business, we're learning about what the founder wants to do after they sell their business. And some folks want to go out and buy a boat. They should do that. It's the American dream. They've earned it. And some people, they want to stay in the business and keep running the business. And that's great, too. But talking about what it's like— we'd love for them to stay in the business. We want to collaborate with them to grow the business going forward. But you got to talk about what it's like. And part of what it's like is One of the first questions people ask is, well, who can I hire and how much money can I spend? Because I'm no longer spending my own money. I'm now spending someone else's money, right? The big new facility that I wanted to buy, can I buy it now? And so we set out kind of a river without boundaries becomes a swamp. So we set out boundaries. We call it delegation of authority about here's what this is going to look like post-transaction. And that's all part of that disclosure and relationship building pre-transaction. So that once you get on the other side of the transaction, and there's a lot of commas involved, that there's no surprises.

How long you've been in private equity world?

I've been making direct investments off of private balance sheets since 2002. A lot of that was in the family office world. Then in 2015, I was ramping out of private family office. 2017, I went out as an independent sponsor. In '22, I joined our current firm, Broadwing Capital.

It seems like PEVC is thrown out a lot in conversations. In the last 20 years, what type of evolution have you seen in the private equity world?

It's changed radically. 20 years ago, private equity was just barely a thing in Dallas. I saw Stephen Schwarzman come present in 2004 for I think Blackstone Fund II. He was talking about his value creation plan where they had all their CEOs come together. That was more novel. It wasn't brand new, but it was more novel at the time. Since then, that was access to really large pools of capital at an institutional level with best-in-class investors. The lower middle market was— it was pretty much the Wild West. It was highly unregulated. It was highly unserved. Flash forward 20 years, now you've got a full-scale spectrum of private equity from a company earning $2 million of EBITDA to companies earning $200 million. And then you've got service providers and vendors and lots of different industry participants all up and down that spectrum.

Yeah.

And a whole universe of— and outside private equity, he said, use the term independent sponsor, which I don't know if that gets lumped into private equity or not. It connotes, you know, somebody who's— or a group that's buying businesses and they're funding it on a deal-by-deal basis as opposed to having a captive fund. Now there's a whole world of searchers. Entrepreneurship through acquisition has really exploded. And so on deals I work, which are typically $10 to $50 million enterprise value, He's playing a little above me. We intersect. We have an overlap. But I mean, at the EBITDA levels he's talking about, those are $100 million-plus firms. And I tend not to play there because that's where Houlihan Lokey and Stephens and Raymond James are. And I'd rather not compete against them. I'd rather compete with people that are downstream. The universe of buyers has expanded dramatically. And it's sort of good for the lower middle market and for Main Street businesses because I think there's a whole universe of people now who have read the books and gotten educated on how to buy a business. And the SBA is very active in that space. But at the same time, for me as an intermediary representing sellers, a lot of these people come and they, they don't have committed capital. And so it really changes my job because I have to spend a lot of time trying to figure out if they can actually write the check. And sometimes that's harder to discern than you think it is.

Right. Right. Well, where we would overlap is if we had a platform company that would go back to a plumbing example. We buy a big plumbing company and you're representing a small commercial plumbing. That might be a perfect fit for us to acquire.

That's a bolt-on and add-on acquisition. And I see private equity guys like you playing downstream more and more. It's not uncommon now for me to have even a million, $2 million business that's an add-on for private equity where I get a mix of private equity. And that's where you intersect with the individual buyers, the searchers.

That's right. And it depends. There are some folks who take their company to market and all they want is the dollar, right? They just— it's the highest price. And then there are some folks who say, well, it's less about the price, it's more about the legacy. And that's important to some folks. And some folks are different points on that spectrum. And they're going to gravitate towards a buyer that fits that kind of desired outcome, which may or may not be the highest paying buyer.

Yeah, we, we had a client who took an offer that was a few million dollars cash at closing, lower than the next best offer. But the next best offer was a private equity fund with experience in his industry, whereas the other buyer did not have that experience. So Sometimes the best quote-unquote offer doesn't necessarily come from the best buyer. I spoke at a conference in St. Louis a couple of weeks ago, the Buy Then Build Summit, which is Walker Deibel's book, which is a great book on entrepreneurship through acquisition. And they were very frustrated. I was on a panel where they wanted to understand why we were selling all our businesses to private equity.

Because they're playing in that space.

They're playing in that space, and because they have committed capital, and I don't know whether you guys can perform or not. Now, Walker announced that they've created a fund now to provide capital so that they can come to the table and say, I have commitment.

They're responding to the market demand.

Responding to the market demand. And that's great, right? It's good for me to have as many buyers as possible for a deal.

So speaking about as many buyers as possible, and forgive me at the ineloquency of this question, but I've heard a lot lately that private equity and family office is like, well, family offices for years have not necessarily had to compete. But now that there's so many acquisitions from private equity, that there's a lot more competition between the PE world and the family office world. Now, is that an accurate statement and am I wording it incorrectly? Do I sound like an idiot if I say that, or did I just hear the words wrong altogether?

I mean, like in a lot of things, it depends. There's a saying in the private kind of family office world, if you've seen one private family office, you've seen one private family office. They go to market in lots of different ways. Way to categorize the world, and there are exceptions to this categorization, is private family offices more often have a longer time horizon. They're more buy and hold. Some of them are buy and hold forever. Whereas a private equity fund will typically have a limited duration on its hold period. We call it a partnership period, because we really want to reinforce, hey, we're doing this together. We're taking the seller to the next transaction and we're collaborating to create the value creation roadmap that they couldn't accomplish alone.

And the explanation behind that is that private equity typically is sourcing capital from investors. Investors want a return of that capital over a period of time. Whereas if it's a family office, it's a crow family office, they don't have outside investors typically, and so they can hold it literally forever if they want to.

And then there are very institutional, very sophisticated family offices, like the Crowe family office, and they will partner with other investors. And so then they will look more like a private equity fund in that regard. Certainly, their talent base is top-notch, their diligence is top-notch. They're best-in-class market participants, but they're a family office. They're more of an exception to that blanket statement.

What industries are you currently focused on right now?

We focus on two industries, business services, which is pretty broad. This could be everything from a commercial construction company to a PEO or an accounting firm. A B2B commercial services accounting firm, and then niche manufacturing. I've got some manufacturing experience. My two partners have significant manufacturing experience. And so business services and niche manufacturing.

US-based.

Happy to have offices and operations abroad. We've done that more than once, but US-based, first-time institutional capital. Stable to growing businesses. So that takes out some of that VC and/or distressed angle. And then in businesses that we have experience in and underwrite well.

And how important is it to have experience in those fields as the private equity firm, like a subject matter expert?

Well, just It's really important. It's really important. You can always go out and access third-party experts. You can access someone for a board seat, or maybe you can hire a best-in-class CEO or other members of the C-team to help you operate the company. But knowing kind of the nuances and what makes any specific industry unique— I have this, this rubric where I say 70% of business is the same. It's all profit equals revenue minus cost. It's a P&L or an income statement. That's all the same. But the 30% is what makes it unique. That's what makes it sparkle or nosedive. And understanding the nuances and the context and the intricacies, the idiosyncrasies of the way a particular industry and company goes to market, that's where you can speed to acquisition and you can you know, do the rocket ship growth quickly, or you can muddle along and figure it out. If you've got some reps in the space, you're, you're gonna, you're gonna flatten that curve and get there faster.

I'm wondering how you view in construction, particularly, and in manufacturing. I represented businesses in those sectors earlier this year, right as the tariffs were being announced. And it was crickets when I took those businesses to market because of the uncertainty. All of a sudden, they didn't understand what their P&L was going to look like because they didn't know what their cost of goods sold was going to be. It feels like we're turning a corner there, although last week, we had the China tariffs. I don't know whether they are a fact or a possibility. But how are you seeing that? How is it affecting your existing investments in businesses? And has it changed your approach to acquiring in that space?

It's been an interesting time. There was a lot of uncertainty coming out of COVID The supply chains were messed up, workforce kind of eligibility, not from an immigration status, but who's sick, who's not sick, what, what places can we have access to? And so we navigated as an economy, we navigated out of that uncertainty pretty well. There are still implications in supply chain coming out of that even now in 2025. For the tariffs, it's, it's an echo of that. It's the same kind of thing where we talk to business owners and they're not exactly sure what their margin is going to be next year because their materials might be more expensive and they kind of don't know. If you've got a construction business and you're looking at a large commercial project that's bidding a year and a half out, you might put escalators in the bid. Right. There are some things that COVID introduced that, that previously were not kind of tools in construction companies like price escalation clauses in contracts. That's a new one. So that's become more widespread. I do think we're at it. We're not in an election cycle right now, but there is this uncertainty around tariffs and what's going to happen. Generally, it acts as a suppressive effect. Everything slows down. Buyers are a little more cautious. Sellers are a little more cautious. I think of our business very simply. It's buyer expectations, seller expectations, and cost of capital in between. If the seller thinks they're going to get a whole lot of money for their business and the cost of capital is very high, then the buyer's return expectations have to moderate. Something's got to give. And so uncertainty creates— tariffs create a ton of uncertainty in that buyer or seller expectations. What is my business really worth in a post-tariff environment? And then it depends on the business. Some businesses have a lot of tariff exposure closer to the pure commodities business. Some businesses have second derivative commodities exposure, tariff exposure.

Where does speed come into play? Because— and the reason I'm asking is when we bring up tariffs, a buddy of mine, they're a manufacturing company out of Mexico and steel manufacturing. And obviously when the tariffs hit, they had to pivot very quickly and their pivot was to buy American steel, ship it to Mexico, manufacture it, sell it back to the United States. And but because it's American steel, there's no tariffs.

Yeah.

So in the PE world, where does the speed of things— because obviously, you have to go through that long due diligence cycle. I think you've quoted 18 months, 6 to 18 months for exiting companies.

For exiting, from the beginning of a dialogue with the seller to going to market to actually getting a transaction. I will say that these things can drag out due diligence because The purpose of due diligence for a buyer is to mitigate risk, right? Figure out what can hurt me here. And the more variables there are, the longer it takes to get to that place.

So the question I have is, is where does speed come into play in this conversation? Is it, you know, getting hedging your risk aspect, or is it, hey, let's get to market so we don't lose the deal or get to market so we can dominate?

I think we generally have the view that a good business today is going to be a good business tomorrow. And if there's some uncertainty that you need to diligence or underwrite or understand, you just hang around the hoop until you understand it. And so you keep that discussion going for a long time. One of the things that we do at Broadwing really well is we'll underwrite an industry off of a thesis before we start sending out offer letters to companies. So we'll really try to understand the industry, the dynamics, the players, what an exit might look like. We'll have subject matter interviews, we'll go talk to folks who have sold in the industry. We'll do all that before we make our first offer. So we're already pretty well studied in the dynamics of the industry. And so tariffs are a level of uncertainty that might affect value in the short term. Maybe we have to figure that out. Maybe there's some puts and takes there. But over the long term, a stable business is going to be underwritten well and it's going to perform well. You move too fast and you risk a footfall and then you get into a business that you maybe didn't want to be in.

Yeah. You talked about valuation expectations on the part of sellers, and I'm sure there's a size issue here. Maybe businesses at $100 million, the sellers are more sophisticated. They probably have a better understanding where I play in sort of that $10 to $50 million founder-owner operators, a lot of times there's a lot of misinformation. All right. They've figured out the value of their company based on SpaceX or something.

Right.

And so they have a very inflated expectation of, of what their business is worth. And so that's one of the things I try to hit on the front end. But I do find that generally speaking, there's a meaningful disconnect in terms of business owners' expectation of where they're going to transact in their business. And I think it hurt. I think it is the reason that if you believe that, you know, the closing rates that get bounced around in our industry where only 30%, 40% of businesses actually transact that go to market and you sort of think about why don't— why is that? Why don't more transact? I think part of it is that front-end valuation. And the second— but even with that, once you get under LOI, Firmex, who's a vendor in our space, publishes an annual survey. They said that over the most recent survey, 30% of deals fell out between LOI and closing. So even if you have an agreement generally on valuation, you still have a 1 out of 3 chance. Where do you find the biggest challenge in working with founder-owner operators in the lower middle market space?

Well, there's kind of 3 broad categories. There's what is my business worth? Because we were talking earlier about a cocktail party. Well, people talk about the crazy valuations that somebody sold their business for. And I heard that this guy who's a competitor in my space, he sold his business for 25 times. Well, yeah, he's in the same space, but maybe they're much larger than you and they've got better systems and more dispersed geographies or whatever. But in that individual— owner's mind, he's in that same space, right? So first is, what's my company worth? What's the value of it? Second is, what is the process like? The process is rigorous, right? People don't buy companies on a wink and a smile. They do institutional-grade due diligence. There's tax underwriting, there's operational diligence, financial diligence. A lot of times folks want to meet the team. So the process itself can be intimidating. And then thirdly, there's that aspect, what we were talking about earlier, of what does it look like? What's life in a post-transaction world look like? What does this look like for me? What does it look like for my team? And if you're a first-time seller and you're going through that discovery, you don't have any access to that. Maybe you've read some books, you've heard some stories at cocktail parties, maybe you talk to your buddies. Great lower-middle-market operators are often in peer groups.. And those peer groups are a great place where a founder or a family owner or a small business operator can go learn from what other folks in this industry have done. But some— that whole process is really a process of discovery for a seller. And some sellers, at the end of the day, they're just not interested. They'd rather stay and run their business.

And there's probably one other aspect to that cocktail party, which is maybe that person's full of crap. Maybe they're just Fudging a little bit.

Because guys at a cocktail party and talks about a bad deal they did, right? I sold my business for 2 times, right?

Yeah, right, right. And it's like, you know, because if we had a cocktail, everybody wants to inflate their own self-ego.

And it was like the fish is— it was that fish.

Yeah, well, it's how about by the end of the party? Yeah, right. It was actually a shark.

The more alcohol, the bigger the fish.

Tell the story again. Tell the story again. That's right. Look, I have 3 young men. They're exceptional. They're good looking. They're handsome. They're smart. Everybody wants to believe their kids are good looking, smart.

I was hoping you're going to say they were your kids.

Yeah, they're my kids.

Hopefully, not employees.

No, no, no, my 3 sons. But that's the case of a business owner, right? They believe their business is exceptional when maybe it's just average.

Right.

And in the lower middle market, one of the things that I feel like we at our firm, we add a lot of value on is trying to manage their understanding of what that process is going to look like. I don't know that any business owner to that extent— my children are all good looking and smart. I don't know that any of them are psychologically prepared to go through a quality of earnings analysis. It's tough. Where it's 90 days of an accountant tearing your business apart. We literally had a QoB done on a business where, and I'll try not to embellish this, there was like a $14.73 check from 3 years ago that kicked out in the system somewhere. And it was kind of a snapping point for my seller. He was just like, I've spent 90 days answering questions for these guys. That's it. I'm done. And usually they're not done. Usually you just kind of have to calm down and say, The buyer's writing you a very, very large check and they've hired these folks to tell them, you know, if there are problems or issues. And I know this sounds silly, but the Q of E followed by a legal due diligence process, it's also really intense. Yeah. You know, getting a, you know, 60-page purchase agreement with 10 pages of reps and warranties. You know, I don't know that Even when I try to prepare my clients for that process, I don't know that you can fully prepare them for something because it's very emotional. Because of that, it's my baby and it's the best looking baby. And what do you mean, why did I make that decision about, you know, that? Are you challenging? They feel like they're being attacked, right? Where the buyer is trying to figure out where can I get hurt, right?

Is the business you're selling me the business I'm buying? To what extent are we going to be teammates or partners going forward? My job today, I lead our operations group. I get to work— I tell people it's the best job in the firm, because I get to operate at the nexus of these four populations. The investment committee, so these are the folks on the deal team side who are sourcing, underwriting, developing themes, financing structures. Then we have a best-in-class operations team that I lead that works with our management teams and helps us execute our value creation roadmap. And then we have these sellers, the, the people who have started and grown these businesses. And we— I really do think that our job is to equip and enable them, right? So there's language matters, and how we talk about our management teams matters. This isn't a, oh, well, they're less sophisticated operators and we're highly degreed professionals. Well, none of us ever built a $100 million company from scratch. We bought a lot of them. So there's a high degree of humility and respect. And then we have this fourth population of third-party service providers. And so I get to operate at that intersection of those four different groups. It's tremendously rewarding, one of the most rewarding parts of it. Is to work with the sellers and be a collaborator, right? And say, this is how we're going to go through the process together. Here's how we're going to identify— here's what your business is today and here's where we'd like to take it with you, right? For us to do that, we say two ears, one mouth. We're going to spend twice as much time listening to you as we are going to tell you what you're— what you should be doing, because you're the one who built the business. Now we can institutionalize and professionalize the business and we can help it expand rapidly. But, but this is your business and we're partnering on growing it together. It is tremendously rewarding work when everyone's aligned and pursuing kind of the end state together. It's really fun.

Yeah, I think that's such an impactful statement just because like even in my business, I've gotten business advice from friends who have never built a business, who've never had employees, who maybe they had a business for 6 months, then folded. It's like, respectfully, this is a 5-year thing. We're 5 years into this thing. But I also have to have the humility of going, just because maybe the source is not the best, but maybe what they're saying is good. So again, you have to listen to it, filter it, see if it needs to be applied. But one of the things that I've learned, maybe not recently, but the past couple years, especially with doing a podcast like this, is the different leaders, the different builders, it's a spectrum. Because what makes a good leader as a CEO, maybe that's not the same person that's built it from the ground up. That's right. And like what you just said, marrying somebody who built the thing with adding that institutional, you know, professionalism to it, that sophistication and just being able to communicate those things.

We think of private companies like a book with different chapters. There's a right protagonist for every chapter, but it's not the same protagonist for every chapter. So there might be one leader who starts and founds the business, and then there's another one who grows it to 2-state operation and takes it to $20 million in revenue. And maybe, maybe then they take a partner on and they grow to $100 million. And then there's a fourth group that comes in to take it. So they're just chapters in a, in a, in a life cycle. At the end of the day, though, it's all about the people at the front lines who are producing revenue and the customers that you're serving. And if you lose sight of either one of those, if you lose sight of the creative and productive engine of your employees, and if you lose sight of your customers, it's— you're off course.

You're headed for a shipwreck. So I don't know what this says about me, but when you were just talking about that, the chapters of the book, I thought about Walter White, Breaking Bad. And I think that's a good analogy, but at the same time— Not a book, but okay.

What's that?

Not a book. I know it's not a book, but I'm talking about the journey of meth production. Thank you, JJ. Obviously, I know it's not a book. I'm saying the progression of a character where at the beginning of the show he's one way and by the end he's a completely different character. I know in the book or in your book analogy, maybe it's not the same person, but maybe not the same person doesn't mean it's a different human. It could be the same person or same human, just a different mindset at that time.

It's true. It's true. Post-transaction, we were talking earlier, but some leaders, some sellers, they want to go buy a boat and go to the beach. That's great. They've built a great company. Some of them are really invigorated by the shot in the arm of new capital, new energy, really expansive growth planning and partners to do it with. And so I've had the privilege of watching some founders, all of a sudden they start reading all these books about PE. And then they start reading Patrick Lencioni's Five Dysfunctions of a Team. And all of a sudden, they're turning themselves into best-in-class operators. And they're reading the same stuff everybody at all the MBA schools is reading, right? That's so rewarding because they are transforming into a different kind of leader.

So in my case, my father went to high school with the gentleman that founded Holiday Inns, Kemmons Wilson out of Memphis, Tennessee. And when Kevin started Holiday— started franchising Holiday Inns in the late '50s, he went to his friends that he knew that were home builders, which was half the people he knew because it was post-World War II, you know, construction boom. So my dad became a Holiday Inn franchisee. He went to the bank in Memphis and he pledged the $10,000 cash value life insurance policy and my mother's wedding ring as collateral for a construction loan. And he built a chain of of Holiday Inns across the Southeast. When I was not in— from the time, earliest time I can remember, 8, 10 years old, I don't know what it was. If I wasn't in school, then I would go with him to his Holiday Inns. And I had every bad job you can have, right, in a Holiday Inn, which actually turned out to be really beneficial. And I'm going to connect the dot to your educational background because he went to war instead of college. And so he didn't really think much about a college education. I graduated high school in 1976. And he said, "Son, you go to school." Actually, he took a map out with a protractor and he drew a circle about a 100-mile radius around Memphis. And he said, "Son, you can go to school anywhere you want, anywhere you want. I'll pay for a school inside the circle." Inside the circle. That's a state school. There are like 3 state schools, right? Yeah. Within a 100-mile radius. So ultimately, he knew where he wanted for me to go. And that was his clever way of getting me there. And he said, "You study." whatever you want. Doesn't matter what you study because it's not going to matter because you're going to come out of college and you're going to go into the Holiday Inn business with me. And so I went to college and I studied philosophy and history and psychology, right? Um, and my senior year I came home for Thanksgiving or Christmas and he said, son, I've got great news. I've sold the business and I've retired.

So now what am I going to do?

Now what am I going to do? I took my history and philosophy and psych degrees, and I waited tables for a year and fell backwards into the financial services arena. But you too are a liberal arts student.

Yeah, for sure, and have an atypical career path. I like to say I'm the only person in private equity who's dug a real ditch. I'm sure there's other people out there. My undergraduate was at the University of Oklahoma, and I too could go to any— I was from Oklahoma, could go to any school that started with an O. And I did a degree called Letters, which was like the plan 2 major at UT— history, literature, philosophy, and foreign languages. Yeah. In my case, Spanish and Latin. And so most of my colleagues went to law school. I didn't want to go to law school. Yeah. So not knowing what to do, I was a carpenter as a kid, paid for part of college swinging a hammer, and I moved to Colorado and I built custom log homes. And I lived in a small town in central Colorado for a couple of years. Then I moved to Denver, and in Denver I was building tract homes. I was a construction worker, superintendent, and a guy recruited me to move to Austin and help him with a high-end for-profit summer camp and what we would now call wedding and event venue. This is in '94. So he needed someone who was young, single, bilingual, had experience in construction, and, and so I He hired me to go move to Austin. I didn't even know Austin was such a great place to live. And in '94, it was amazing. It's a little more crowded now. Ultimately, I met my wife there. Um, he taught me how to run a business. I remember the day he showed me. I was, I was evaluating, uh, utility power consumption. I think we had 11 power meters, and I was charting it out on a yellow legal pad. And he said, you should use Microsoft Excel for that. And I said, the thing with the boxes? That's I'm not— and he pulled up Excel. And he actually pulled up Lotus 1-2-3. And he showed me how to use it. Because it was a big deal when we switched to Excel. He was the one who taught me that everything is a business. Church is a business. School is a business. Oh, Parkland's a business. Optima's a business. And Belmont's a business. It's all a business. It all has these fundamental threads of the same profit, revenue, cost, OpEx, GM. It's very similar in lots of businesses. And so I ultimately left there, went, met my wife, got married, moved to Dallas to go to SMU, had a great time at SMU, was a tremendous program. I'm fond of telling some of the younger guys in our office, I have a text thread that's older than some of them from some of my classmates at SMU. I have a 25-year-old text thread. And that was transformational. Then I went to work for the Stanley Works, Stanley Tools in New Britain, Connecticut. You've seen a black and yellow Stanley tape measure. And from there, I went to work in the family office world and then found my way into private equity. But it's, it's my roots as a homebuilder, construction worker. A lot of times I'll go on site and in assessing the operations, I don't want to talk to the person who's selling me the business. I want to veer off the path and talk to the person who's sweeping the floor or the person who's just leaving their shift or entering their shift. And if I can talk to them in Spanish, all the better and say, what? What's it like? How are you? What do you find working here? And then I try to be very observant around the edges of things that people want to show you about their business, right? What are the parts that they're, that they're obscuring or where are the skeletons in the closet trying to find those things? But I think a liberal arts background teaches you to be curious. It teaches you to think critically and broadly. The idea that you can understand an idea, evaluate it, and really, really have deep comprehension of it without necessarily agreeing with it. The idea that you can understand but still have creative dissent. I used to say that you could pick up the basketball and spin it around on your finger and understand that you're very facile with it, but you don't play basketball. It's that idea that makes you a a really curious and inquisitive operator. And then you're just asking the right questions of the folks on your teams, right? So it's a— private equity is a great place to have a curious mind and an operational bend.

Yeah, the liberal arts mindset, I think, unfortunately, I think people aren't necessarily seeing the value of that anymore. I think there's a lot of rhetoric of we don't need university. There's a lot of echo chambers. There's a lot of I'll just go do crypto, I'll just to build a business. And I think you said it very eloquently about learning stuff that maybe you don't agree on, and being able to respectfully dissent. And I think it is important more than ever, especially the political climate that we live in, to be in rooms and learn about stuff that maybe you don't like, maybe you don't disagree with altogether. And one of the things I've been trying to do lately is, is be a part of organizations that really.

Encourage.

Uh, uh, just disagreement. Um, like one of them, um, is the Texas Lyceum. Um, I'm actually going to an event next month in, in Victoria, and, and that event, that, that group is, is very much so, uh, you know, you've got far right, you got far left, but hey, we can come in the room and, you know, disagree disagreeable or.

Respect— agree to be disagreeable.

Agree. Yes, yes.

Thank you. Or, or just disagree agreeably.

Exactly. But ultimately respectfully, where it's like we can shake hands and then we can argue not with volume, but with the content of our words. And I think that's something that— I don't know what the relevance of that is to PE, but I think it's.

Something that goes to critical thinking that JJ referenced. I saw a 60 Minutes piece on the University of Austin. And I was not that familiar with it. It was largely funded by people on this campus, including Harlan Crow. And it is a liberal arts school that not only accepts but promotes dialogue, and intellectual discourse and disagreement. And it was very refreshing to see that, you know, I felt like once I got into financial services that I could learn what I needed to learn about finance. But, you know, the mindset of going through a liberal arts education, philosophy and psychology and history, I think had a much more pronounced impact on my ability to have a successful career in wealth management because it was about communicating. And I think liberal arts, generally speaking, particularly English, you're going to be a better communicator.

And with AI, I think that right there, you know, the EQ aspect, the human, human intelligence, the human, human emotional intelligence is going to be much more impactful. But speaking of AI, it feels like— I mean, I forgot what the number was, but I posted about this on LinkedIn the other day, how much America as a whole is really betting on AI. And how it's just soaking up so much investment dollars, so much press, everything. For your business, if you're actually looking for more of the service base, does that make— if everybody's looking over there, does that make it less competitive for you, or does that force you to go, maybe we should be over there as well?

I think AI is a tool, just like the internet's a tool. Tool, just like computers are a tool. I think we're in the early innings of how that tool will be applied commercially, broadly. All over the private equity industry, people are saying, well, how are you using AI? And how are you using AI? What I do know is we have— we don't have a robot who can put on a roof just yet, right? We don't have a robot that you're going to call to redo the bathrooms at the Cotton Bowl just yet. One of our businesses, we, we make upfit law enforcement vehicles. That's a very manual, highly skilled job. We're making police cars. Can AI equip those folks to do their jobs better? Sure. But AI is not turning a wrench or putting on shingles just yet. That having been said, there are lots of folks who are looking for ways to use AI in those kind of traditionally blue-collar businesses, right? How do you use AI to help you with lead generation? How do you use AI to help you evaluate manufacturing defects? How would you use AI to generate a new plant floor layout? I think it's early innings. It's really exciting because now we don't think anything about the fact that we all carry a supercomputer in our pocket. But in 2015, when we were kind of coming out of the Palm Trio, and there was the BlackBerry, and then all of a sudden there was the iPhone in '17, and now it's no big deal, right? Everyone's got a camera, a phone, a calendar, the internet, and a whole bunch of other stuff in their pocket. And it's just— that's just table stakes. In another 20 years, I don't know what it's going to look like, but that's, that's how I see AI going. I want to go back, though, to the— to this idea of, like, the value proposition for college and It dovetails with this issue of technology. We're at a really fascinating time in the US economy where the blue-collar trades are really, really, really highly paid. There's not enough of them. The demand for their services is constant and growing. There's fewer people entering those industries. If you want to go be a general business major and go work as an entry-level job at some firm, a grocery store firm, I don't know, whatever, a distribution company. You might make more as a construction worker, and you might make more as a construction worker for the first 5 or 6 years. Now, the earning potential of someone with a college degree may or may not be harder, but then you get into that second 5 years of a young person's career, and it's less about their degree and it's more about their their work ethic, their ability to do quality work, their ability to learn new things, take feedback. And we all know going to college is not just about the classroom. It's about the relationships. It's about managing your life. Can you get yourself to class on time and pay your parking bill and do your laundry once a semester or something like that, right? I mean, all of those things is just personal management in addition to the education side of it. Technology enables enable some of that. It can enable some of the education side, but technology doesn't enable the building and finding of new relationships person to person. It does in a social network kind of way. Technology doesn't necessarily help you to do your laundry once a quarter or twice a quarter, whatever. So it's a really interesting time for the value proposition of a college education. I'd like to posit that It's fantastic that a college education is not for everyone. You can make plenty of money. You can be a fully credentialed business owner. You can live the American dream and never go to college if you're a good entrepreneur and a good business owner. Similarly, you can go to college and burn out, right? Maybe you're not a good student. Maybe you don't put forth the effort. Neither path is a guarantee of success, but there are successful successful paths in both options. Just a.

Thought. I agree with everything you said. For the AI aspect, though, the investment side, because what it sounds like, if I can distill from the answer, is it's almost, at least for you guys, it's a tool. It's not an investment strategy because you're focused on the surfaces that you've already that you've already been— that's your genius, that's where you're at. And just because everybody else in all of America is pointing their wallet back there, yeah, that's good for them, but you're going to stay where you're at.

Yeah. Is that— yeah, well, it's early innings, right? And— but I think that there's still lots of competition in the business services world. Um, I wouldn't say that all of America is focused on.

AI.

Um, it is the— it is the thing though right now. There was a time There was a time in the '50s when there was The Revenge of the 50-Foot Woman and The Blob, and there were all these movies coming out because what was in the, in the kind of the social consciousness, the zeitgeist, you know, the spirit of the age, was what is the nuclear bomb going to do to us, right? What would the effects of radiation be? Well, you see the same thing, and now it's not on movie screens, it's on Netflix and, and all the streaming services. It's what happens when the computer takes over, right? That's fear that's underneath, and that's what everyone's preoccupied with. But no one knows, right? They're yet to be written, the chapter of that book.

It could bleed into thinking about the disruptive effect that AI can have. I suppose if I were private equity and I were looking at businesses and I felt like I don't understand the risk at work here with AI, could it be disruptive, disrupt the business model, affect the earnings capacity of the business? It could drive valuations down. For segments, probably, and certainly in my mind, too early to even forecast that. Although, as I said earlier today, I, I'm an instructor at SMU. And after a class last month, a few students came up afterwards and said, you know, when I graduate, I want to go do this and that, is AI going to displace me? And the answer is, I don't know. And I don't know that I would make choices based on that, because I don't know that knowable at this point. I think I'd pursue your passion and what you're good at and what appeals to you. But then I did a little research, and you can find exact opposite opinions by equally smart, intelligent people that it's the worst thing that's ever happened to civilization and it's the best thing that's ever happened to civilization. And it's probably neither.

It will create new opportunities. Yeah. You think about 10 years ago, I don't know that the term the title Chief Data Officer existed, right? But now there's— or, or CIO, meaning Chief Information Officer. Used to be CIO was only Chief Investment Officer, or CTO, right? There's— CTO has been around for a while, but it'll create new careers, it'll create new opportunities, and it'll create new pitfalls also.

Yeah. So to, to go to your point and then circle back to your point and marry the two is the, the value of a liberal education, and then understanding that there's an opinion over here and an opinion over here, and they're directly conflicting. It's having the open mindset of realizing that both could be true, both could not be true, and maybe the answer is somewhere in the middle. Maybe the answer is in a different room. Being able to have that mind open enough to go, if there's not a consensus on an answer, maybe because we don't have the answer quite yet. You know, so, but to give credit to the liberal arts is just having that open mindset of, uh, of not jumping on, because I think too often that echo chamber is like, well, Lane says this, so I'm going to agree with that because I'm, I'm on Lane's team. Yeah.

Yeah, I think of it as both the humility to recognize that I don't have everything figured out, we don't have everything, and, and the humility to say, well, Lane and I have a different opinion, but I have something to learn from him. Right. I have something he— and maybe he has something to learn from me.

Right. So in the PE world, is it— for your firm, is it standard practice for that 6-month wait, or is it like almost like you said before, where every business is different, every situation is different? So we start— and by 6 months away, I meant 6 months to learn, to see what the previous owner was doing before you start tweaking.

We start engaging our sellers on what we call the value creation roadmap before we close the business. And so we try to get alignment on what our exit state looks like before we even close the business. And we do that through a series of tools that we've developed after lots of years in the private investment space, so that once we get on the other side of the transaction, we can start that value creation roadmap together pretty quickly. We, we're still listening, we're still learning, but, but we're not moving the operator or the seller aside. Rather, we're doing that in conjunction with them. So we're more of the let's, let's go ahead and understand the direction we're going right after close and then start working towards that.

You know, with PE and VC and all that, it feels like sometimes there's this urge to, to go for the sexy thing. You know, roofing and service-based feels more like the Dirty Jobs, you know, Discovery Channel thing. Within that lane, what's been your favorite, favorite industry, favorite transaction?

You know, that's like saying who's your favorite kid?

Okay, who's your favorite kid? Yeah, we can start there.

Yeah. Well, it depends on which one of them has been nicest to their dad this week. It really is. They all have great things about them. The industries, generally, we like industries that we can understand, easily underwrite, and where we have a line of sight to what exit is going to look like. We're not investing speculatively. We pretty much know where we're going. And we like industries where there's not a lot of other private equity players, right? They're not residential HVAC, for example. It's a very crowded space. The valuations have gotten very high. You know, when The Wall Street Journal writes an article called Main Street Millionaires in the HVAC space, or whatever that article was a few months ago, that, that the story's out, right? Everyone's investing there. So if you can find a value creation play, value creation play where you're taking one company and creating both a revenue and multiple arbitrage, you're making it bigger and you're making it earn more. And there's a, there's a really demonstrable path. Those are the really fun ones. Generally, we'll stick to things where we've got some level of experience, but we're about a 20-person firm now. And so we've got a broad group of resources to draw from. The operations group that I lead serves on They'll serve on the board, they'll serve as a facilitator or a coach, and they'll bring kind of all their 20 years, 30 years, 40 years of experience into the mix. And so generally, we're investing in something that we've underwritten before that we understand pretty well.

What do you find is the biggest.

Challenge in that type of world? In underwriting or operating?

Just the whole process.

Well, this is what we were talking about with Lane earlier. Seller has this view of their company, and the buyer wants to make sure that they really understand what the seller is selling. And you're a willing buyer and a willing seller, right? Definition of capitalism. And you're working towards a transaction, but you do have competing interests. And so that sometimes causes some friction. The hardest part about operating the businesses and creating value is always the people. I had a friend who told me, business is messy, get over it. Right. It's just— it's true. It's messy. And good leaders, I think, lean into that mess and they, they have the awkward conversations early and often. At the same time, it's those people who are responsible for delivering the value creation, delivering the strategic plan. And so, so you've got to make sure that they've got buy-in and they've got a path forward, that they understand the which way and the where and the why. Hey, we all want you all to pull in this direction. Now we know where, but why? Why are we doing this? And then how are we going to get there? And so we do a lot of what we call CEO cultivation, which is just trying to make sure that the CEO and the sponsor are all on the same page. So the hardest part is always people, right? The hardest part is working with people because it's difficult to keep a bunch of Type A players aligned on a single strategy while everybody's moving 100 miles an hour. You have competing priorities.

Well, one of the things I was going to lean into from that is, you know, if I'm a financial services firm and I've got my MBA from SMU and I've got my doctorate from Harvard and I get a blah, blah, blah, blah, blah, blah, I would assume there's a level of sophistication there. But like for like the services where it's like maybe I did a lawn service or landscaping business and I started in high school mowing lawns, and then I hired my friend, and next thing I know, 30 years later, XYZ, 1, 2, 3, you know, obviously there's a level of sophistication to grow that business to that level. But have you ever been surprised coming in where there's somebody that has a 5th grade education but they're running their business better than that Harvard PhD.

Type? Yeah, it's just different kinds of experiential wisdom. My colleagues that graduated from Harvard and Ivy League schools, they've got one kind of training. The guy who grew up on the mean streets of upstate New York and grew a $100 million business, he's got a different kind of training. Both of them are experiential wisdom applied in different contexts. It is amazing how much— how much business you can— how much money you can earn, how much business you can grow with really simple, consistent execution. The best-in-class operators of services businesses are people who execute every single day, execute every single day. They just keep making money, very, very consistent, not prone to erratic strategy shifts. They, they find their lane and they just keep going day in and day out. Really, really productive operators.

I like that you have the roadmap, if that was the terminology you used, where you're collaborating with the seller during the due diligence process to determine how do we move forward, what's our business plan going forward. I've run processes where private equity was a buyer and there's sort of this warm engaging period pre-LOI where everybody's getting along and then you sign an LOI. And then they don't see those people. Right now, I've hired Baker Tilly to do a Q of E analysis, and they've got Winston Strawn doing a legal due diligence, and they're disconnected from the private equity firm who's basically like, these are my guys that are going to come in and put you through this stress test and figure out. And I see deals really get sideways because of that disconnect. It sounds like you guys have, whether that was the motivation for it or not, it sounds like you found a way to stay engaged with the seller in a collaborative way. So in a process that you correctly said is by nature adversarial.

Yeah, well, hopefully it's not adversarial, but there may be competing priorities. Yes. Right. And so let's, let's use a word picture. Imagine I'm a general contractor and you hire me to come renovate your house, kitchen, bathroom, patio, pool. And I say, great, Lane, here's how much it's going to cost. It's going to take 6 months. Sign on the dotted line, and I never show up at your house. Yeah, I never ask you how it's going. Instead, the plumber comes, the pool guy comes, the kitchen tile guy comes, and I never show up. And, and maybe the tile is the wrong color. If that's our— if that's our analogy, we just have a buyer's rep engaged with the seller all through the diligence process. Right. And so if you want someone to grouse about the QoB process, we'll say, gosh, I hear you. Let me explain where we are and why it's important, what they're finding. And so we act as, again, a collaborator with the seller and the intermediaries so that we're working together through the process. And that's why there's a yield to expertise. At our firm, we've got operations, and we've got the investment side. The investment side is curating the opportunity all the way to the transaction. But the operations side comes in before the transaction and is working alongside the management teams. You're not sitting there getting your kitchen done going, where's the guy who sold me the job?

Yeah, right. Good strategy.

So as we, we, we close, as we come to a close, um, we're getting to the end here, um, we've covered a lot of ground, you know. Obviously we talked, you know, building log cabins in Colorado to, to your current ventures. Now what is the next 5 years for JJ?

I love what I'm doing right now. We're, we're moving fast and we're having a blast We're building a team. We're building a firm that is great for the folks at our firm. It's great for our management teams and our sellers. It's great for our investors. So I think I keep doing exactly the same thing I'm doing for the next 5 years. The team will get a little bit bigger. I think we'll stay squarely in that lower middle market, first-time seller kind of world because we see lots of opportunity to create value and partner with great sellers there. We're generally not buying from other sponsors, but I think it looks like more of the same.

Excellent.

Well, JJ, thanks for joining us on The Deal Table today. My pleasure. Pig room. My pleasure. At Old Parkland, where pigs fly.