If You’re Not Using This $450M PE Framework, You’re Already Behind

"RAISE CAPITAL LIKE A LEGEND: https://go.fundraisecapital.co/frc2-apply"

Are you ready to discover how top-tier private equity firms triple the value of companies in just five years? 

In this episode of Making Billions, Ryan Miller sits down with Eliot Kerlin, Co-Founder and CEO of Broadwing Capital, to lift the veil on the high-powered operational strategies used by institutional investors to transform ordinary businesses into unstoppable growth machines.

Whether you are an emerging fund manager, a family office principal, or a founder looking for an exit strategy, this discussion provides a masterclass in operational excellence and strategic value creation.

Subscribe on YouTube:
https://www.youtube.com/channel/UCTOe79EXLDsROQ0z3YLnu1QQ

Connect with Ryan Miller:
Linkedin: https://www.linkedin.com/in/rcmiller1/
Instagram: https://www.instagram.com/makingbillionspodcast/
X: https://x.com/_MakingBillions
Website: https://making-billions.com/

[THE GUEST]: Eliot Kerlin serves as Managing Partner of Broadwing Capital, which he co-founded after 20 years of operational private equity experience.

[THE HOST]: Ryan Miller is a recovering CFO turned angel investor in technology and energy.

Transcript

Eliot Kerlin  

I think our first thing is looking at the debt load. And we're in the business of leverage buyouts, right? We put the, got to have the L to have an LBO, got to have the leverage. But rates are high, and so if, if we can underwrite today's rates and maybe even slight rate increases, then we feel pretty good about the next five years, where we would expect to see rates continue to drop over time based on the strength of the economy.

Ryan Miller  

My name is Ryan Miller, and for the past 15 years, I've helped hundreds of people to raise millions of dollars for their funds and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, this show will give you the answers so that you too can enjoy your pursuit of Making Billions. Let's get into it. 

Ryan Miller  

If you want to triple a company in five years, then this is the playbooks pros actually use Eliot Kerlin lifts the veil on quiet power moves private equity operators deploy to turn ordinary businesses into unstoppable growth machines. These are theories, these are the hidden levers insiders use to reshape companies, rewrite destinies and build value at a pace most founders never see coming. All this and more coming right now. Here we go. 

Ryan Miller  

Elliot, welcome to the show.

Eliot Kerlin  

Man, Thanks, Ryan. Really excited to be on. Huge fan. I love the way that you think about business and the lessons that you draw out and excited to be a contributor here part of the community, and now I get to be on the other side, so thanks.

Ryan Miller  

Yeah, it's great to have you, man. You know, let's, let's dive in this. This has been fun, we've been waiting, I've been very excited to talk to you, my man. So you spent more than two decades in operational private equity, including a long run at insight equity, and you've been investing in about seven countries before launching Broadwing in 2022 so my question for you is, how did that evolution from deal maker to hands on operator shape the conviction and structure behind Broadwing's operating model?

Eliot Kerlin  

Yeah, we recognized a need in the lower middle market, where there's a lot of companies, a lot of owners, founders families, who don't have access to the types of high powered strategic consulting, analytical approaches employed by larger companies and by the strategic consulting firms like McKinsey, Bain, BCG, who can really dissect a company, identify problems and, importantly, chart the path to correction. And so we not only want to provide the advice, but benefit from that and the improvements that we make by capturing some of that upside as investors alongside of management. So we employ a lot of similar tools that you would see actually the same tools that we've built on as we've utilized them in lower middle market that a Bain & Company would use. And over many cycles, many industry cycles, economic cycles, and in different industries, you start to see that the same tools apply to any business. And it doesn't matter if it's an automotive company, a manufacturing services, distribution, there's a lot of the same revenue drivers, cost considerations and growth opportunities to pursue. If you use data, if you capture data and use it in an analytical way to chart your strategy and the track it gets.

Ryan Miller  

Brilliant. So, so taking your operating model at Broadwing, I think you guys are around 450 million AUM. So what can say an emerging fund manager, family offices, those you know, all of us are in our own flavors of high finance. What can somebody take from your model and maybe apply it to just starting out and get going? What's some of those excellent points that they can extrapolate to their own business? 

Eliot Kerlin  

Yeah, I think there's a few things, and it really does apply across the board. If you want, there's different ways to approach buying a company. If you have a company in mind, how do you structure the funding for that, the capital? You can do it off your own balance sheet. You could do it by passing the hat, right? We'd call it, whereas it's a little bit more of a pledge fund. And you know that people are interested in what you're going to acquire, or if you want to start building a holding company of companies, wanted to add to it maybe more of a Berkshire Hathaway approach. In any of those situations, what we're always thinking of is, how do we differentiate ourselves from other potential buyers? And one of the ways we do that is through an operational approach, and because it's proven, because it's tested, because we've done this multiple times before, we can point to success examples and use those as we're talking to management teams and to sellers as to why they should partner with us, what makes us. So I would say that having a playbook, whether it's Broadwing's or one like it. Having the experience implementing that playbook, being able to point to tangible, factual results and how that impacts not just the financial returns of the business, but the daily lives of employees, how it gives you a competitive edge in the marketplace to compete against your competitors. That's very convincing as you seek to capture your first investment, or multiple investments as you build a fund. Being operational really translates to being a partner with management, and if you're a partner with them, it's a lot easier to travel that road together than if it's just a transaction. I'm just going to buy it somebody new. This buyer now owns it, good luck with it, right? We want to partner together as we move forward, and I found that to be a very effective way to get sellers to talk to you, to get sellers involved in your strategy and to have their support after you invest in their company.

Ryan Miller  

Brilliant. You know, your firm, Broadwing, you guys focus on founder and family owned, lower to middle market businesses, so I think generally around five to 30 million EBITDA range. So beyond those numbers, what are some of those non obvious screening filters that tell you whether a company is truly a good fit for that operating model that you guys have?

Eliot Kerlin  

So you're absolutely right. We're looking at the middle market as a broad definition now, right? You could say a company with 25-75 million would be a middle market company, because there's private equity funds out there, lots of them that would buy those. We're trying to stay below that 25-30 entry size, our sweet spot is probably 5-20, 5-15. And in that size range, we often find companies where the seller, we kind of see two flavors. It's really a seller or an ownership group or a family who doesn't have a clear off ramp, an exit ramp, we call it. How do they work themselves out of their job, out of their company? Because they're so important, or we often see a founder or an entrepreneur who's looking to scale and they want a partner to grow with them, and somebody who's had experience with with M&A before, with Greenfield expansion, with major capital and capacity expansion projects that involve financial commitment and maybe some perceived risk, signing up to new leases right expanding on beyond kind of your comfort zone and we've got tools and tactics to help grow a company that way. So those are really the two categories, when you're so important to the business that you don't have an exit ramp, it can be very helpful to bring somebody in to help create that scaffolding around the business. And once that scaffolding is built, then the owner, the founder, can step away, right, but until that structure is in place, you never know, as a buyer or a seller, is everything going to collapse when, when that founder steps away, when that family steps away. So we like being the first institutional capital, because there's a lot of opportunity for an operational approach to give, to give scaffolding from a talent standpoint, making sure we have the right team, that we have the right roles identified, that we will need to scale for growth, making sure we have the right technology in place. Technology brings efficiency, by this way, things like ERP system, Customer Relationship Management System, inventory management, a lot of technology that can be done in spreadsheets and more basic ways, maybe manually cutting checks instead of having a payroll processor. But that requires people, and it's inefficiencies, more touch points, opportunities drop the ball. Technology and talent are usually where we start to make sure we have the right people map and understand the gaps and the right technology map.

Ryan Miller  

Brilliant, I love that. You know, it reminds me so in a former life, I always joke around that I'm a recovering CFO. And so when I was brought in to us insurance company we were, I was brought in to help sell it, and I stood up three different strategies that tire pretty similar to what you said. It was people process and technology and really drilling down on that for I know, when you're pre sell it, we call it window dressing. You're just getting ready to make sure everything's tight and everything's looking good. And so we did a lot of that, and it talks just about exactly what you talk about, the technology, the people, all of that. And so my question then is, when you're looking at a company and it sounds like you do a lot of your deals, rightfully so from the income statement, not entirely gone are the balance sheet private equity guys. It's now the income statement, great operators, clean up operations and this is one of the areas that you do so you represent that new wave and which I one of the many things I love about you. Now, what I would love to know is, when you're looking at a company and it looks like it's growing, how do you guys dive into that? Well, how do you dive into really analyzing growth to make sure that you see what you think you're seeing? 

Eliot Kerlin  

Right. Yeah, it's important to unpack that both was driving the growth from a volume standpoint, right? The volume of services or the products that are being made, the pricing around it, and the margin that comes off of that. I think when we're first looking at a company, the real question is, why has it been successful so far, and can that continue? It's easy, it's easy to look in the rear view mirror, right, where, I think we're all inclined to look in the rear view mirror and kind of see what have we done, and understanding what we've done and where that gets us to is important. That's why we do diligence. That's why we dig in on the financials, on the operational metrics, and kind of how operations relates to the financials, what's driving, what was cause, what's effect. But we also need to know what's going to continue. And so, you know, and in private equity, we talked a lot about LTM, EBITDA, latest 12 months. EBITDA, right? And we like to say here, you can't eat LTM that helped the people that sold you the business, right, that was in the past. What we need to focus on is the next 12 months, the next three months, next 12 months, next 36 months. And so as we go into an investment pretty early on, we want to know. What's the vision and the plan where are we headed over a five year partnership period, and where we head over the next 12 months? Because what got us here, and by extension, what got us here is also what we're paying for and so what got us to this price needs to at least continue, and hopefully continue growing. And so we spent a lot of time trying to model out what are the assumptions and the drivers in the business that are going to keep carrying things for and are we still good at that, right? Are there unique macroeconomic tariffs, right, tariffs hurt some people that help other people. Input cost spikes, covid, supply run ups, right? These aren't necessarily durationally significant variables, and so when those go away, what is an adjusted pro forma go forward? Number look like? But we need to know what we're really good at, where we make our money. A lot of companies will offer any service or good they can sell, and then that's in our nature, to sell what we can sell. But just because we can sell, it doesn't mean we're good at making it, or that we're good at performing that service. And even if we are good at it, are we making money? Are we able to price them right? And so we spend a lot of time also understanding what are the value drivers, the pricing drivers, not just volume, but on the pricing side and are we at risk there? Will we get price compression, pricing risk going forward, if things change again? So it really is it price, is it volume, and it's a forward looking, not a backwards looking, perspective.

Ryan Miller  

I love it, man. Now, earlier, you were talking about one of the takeaways people can have is have their own playbook, and you've talked about a five part value creation playbook. So how do you sequence those initiatives in the first say, 120 days post close, when time, trust and capacity are all constrained in those early days?

Eliot Kerlin  

I like that, yeah, time, trusting capacity. They're all in short supply. You're trying to build that right, you're multiplying that. So you really have to be focused. We've come up with a way to focus the first 120 days, and even within that, we have the first 10 days. So we we have a 10 day hot list. And these are the critical, urgent must haves that need to get done and really consume management's attention and in our team's attention up front, and it's, it's an all hands on deck approach. Those are, those are important for cyber security, Treasury controls and management, there's internal communications to key stakeholders. We want to have all of that planned and executed, planned beforehand, but executed in those first 10 days. Moving on into the rest of what we call fortify the foundation, the foundation for scale and growth, but we have a lot we want to get right, and that's our 120 day plan. We're working with management. In fact, you know, we'll typically have one assignment for a Broadwing person, and right next to him is a management person. And so every every item on the list, and there's a tracker that's well over 100 lines long, everything has a delivery date, start date, a delivery date because of the prioritization, as well as an internal owner and a Broadwing, Broadwing counterpart and so we're pushing on those. Not everything's going to get done in the first 120 days, but it's important to know what it is that we're working on, right? And if we need to schedule things out, we can, you can't, you know, go back to your capacity point. There's only so much, and we're asking not only a lot to be done in terms of operational improvement, but we also are introducing a lot of faces, right? A lot of new people, either to their team or from Broadwing. We're also introducing a lot of new processes and reporting cadences and communication cadences, and so we understand there's a lot of flux, and everybody needs to kind of settle into the new environment, so we're willing to extend that out if we need to. 

Eliot Kerlin  

But as we move through the 120 day process, then we we start to introduce more and more elements and develop with management, more and more elements of the strategic plan. And from our playbook we have, we have five parts that I'd be happy to outline, because they're unique, but they also continue to build, right, we start with talent and technology. That's the thing to do, but it's something that goes on for an entire investment, it's always important, right, the technology investment up front can take time and money, and so hopefully that's more discrete, and then it's done, and you maintain and upgrade. But certainly on the people side of things, we're always investing in people. How do we strengthen the team? How do we improve our internal communication? We can talk more about that. We have some tools that we use. Are we getting the right people, incentivizing them, properly describing their roles, so that expectations are aligned and performance is rightly assessed. So we work on that throughout the entire investment period. We also focus a lot on growth and on operations optimization, so we call it gas stepping on the gas growth acceleration system. And then we have ops optimization. And we talk about those every week, even as a firm at our own every week, for every company, we go through talent, technology, growth acceleration and operations optimization. Growth acceleration looks like things kind of three big levers. There is Greenfield growth, new location, new geography, organic growth with existing customers, new customers, sales, engine selling what we already do, and then M&A growth, right, that's always something we look at as well. Is, is it better to go ahead and acquire this skill set for this geography or this customer set than to try and develop it over time. 

Eliot Kerlin  

In addition to those, we were always thinking about exit. We call it asset monetization and exit, so that could be non core investiture dividend recap. You know, we're looking at ways to monetize, and then we're also looking at exit. So we call ame, what are we aiming for? And then finally, we have stakeholder impact plan, and that's something up front where we think about the lived experience of our employees and the communities where they operate. And we want to partner with management to create exciting opportunities, things that they're engaged in, that they feel ownership over, to improve employee lives in the community. And we call that our stakeholder impact plan, and we'll measure that throughout the entire partnership. Some of those take a little longer, but it can be things including employee education opportunities, internal training and retention strategies, community impact and involvement, employee counseling. Sometimes it's stuff like the cafeteria or childcare, sometimes it's working out employee wellness. And so we really want to be intentional about that, because we found that if we're not, it could happen. But you also might look up and say, Wow, we missed some opportunities there for the last few years. So we've learned to try and play for that upfront as well. So those are the growth acceleration system, ops op, teletechnology aim, asset monetization and exit, and then our stakeholder impact plan.

Ryan Miller  

Isn't that all? I'm kidding, that's crazy. Good for you, that's, that's very thorough man. That's, I can see why you guys are absolutely leaders in your industry man. Now you, you said that it's impossible to manage what you can't measure, which I agree. So what is your first 90 day dashboard build look like in a company with, say, maybe some weak data infrastructure?

Eliot Kerlin  

So a lot of times there's, there's a couple of challenges up front to getting frequently, regularly reported, accurate data. And it's finance data that's important, right? Again, we're trying to try to build a windshield here, a dashboard to move forward with. Sometimes you have to start by looking backwards, because that's a little easier to measure. It's not the leading indicators that are being tracked. It's what did we do last month, last quarter, last week. So the first is, do we have a culture that manages by data and appreciates what metrics can do to help us steer our business right? And then the second is, can we gather that and if we do, is it quality data right? Nobody, nobody wants garbage in, garbage out. Nobody wants to just create a lot of data so that somebody else can throw it away or look at it or not, but especially somebody that's not managing the business. So when we develop KPIs, we're trying to do it with management in a way where we say, CEO, CFO, COO, what is it that you intuitively look at to know that the business is going well or that things aren't going well? What is it that you intuitively, over the years, have realized this is important and is correlated with success in the business and then how can we help create a way to track that data, to gather it, store it. We can we can analyze it, we can format it, but really, how do we how do we get it, and how do we make sure it's correct? And so a lot of times, what you're going to start with is cash tracking. You're looking at the leading indicators to the extent you can get them on sales, then on costs and cash is usually the most straightforward. Consolidated accounts, make sure you have control over those accounts in terms of sales, it's a lot of input, right, meetings, leads, bits, orders, backlog, right? Trying to get pipeline a backlog right for any business and then on operations is, how do we convert that profitably into margin? What's our throughput? What's our capacity? What's our utilization of our capacity? That helps us plan for future capital needs? And you can, of course, get squeezed on the cash side for things like working capital and CAPEX as well. And so we keep a careful eye on working capital, in particular, capex, we have a little more time to plan for, right?

Ryan Miller  

So, yeah, it's a little bit of a longer activity when you're building assets. Yeah, and working capital is huge, I mean, that's what, that's how you leave the lights on. So where do you see in some of these companies that you're looking at and you're turning them around, or whatever that might be, where you see a lot of, say, either bloat or waste or, like, some of the gaps or the holes in the dam, and you got to put a finger in it and plug that gap. Where do you see a lot of these companies when you take over, where are they bleeding revenue, expenses, are there common themes that you see? 

Eliot Kerlin  

I think there's a couple, and one may actually be a little bit of the inverse of what you're asking, which is they're too thin. A lot of times they're too thin on financial reporting and operational metrics reporting, so tracking those items that you're going to want to use to build that, that windshield to look forward, to help steer the company, and that often will require beefing up the finance department, accounting and finance managerial accounting, so it could be on the FPA side or more of a controller function, or could be a CFO, right? Maybe it's just been a controller who's kind of been closing the books, but hadn't been a little bit more strategic about using the data on the OP side. A lot of times, we'll see the opportunity for lean implementation, and we often will go through projects with our management teams to identify where there is waste on the plant floor. That's not always just extra material, making too much stuff or not making it to spec a lot of times it can be touching it too much, not having enough automation, where there's too many people involved. Or we could use technology to make things more efficient, make it more seamless, right? The less times that we have to touch or transfer material, the less times that a person has to be involved, the better the chance we can reduce the uncertainty of the production process, and, as a result, improve safety, quality and ultimately delivery, right, right kind of production finished good. So we'll see that as well. So a lot of times we'll do Lean exercises or bring in some consultants that we work with to help look at lean and how can we implement that either in a service company or a manufacturing business. Final one, Ryan is on pricing. A lot of times, you know, we need to understand the value of our product and how the value of our product to our customers and what they really care about. And sometimes we over deliver product, we don't need to make something that complex. Sometimes we under deliver on product, and we're losing sales opportunities, and sometimes we might not be pricing for what we actually deliver in terms of perceived value from our customers. So we spend a lot of time trying to understand, talk to customers, voice a customer analysis, what is it they value? What is it they want from us? Why do they buy from us? And then try and adjust our product and our pricing strategy accordingly.

Ryan Miller  

I love that. You know, when you when you come in, and this is, this is a, we'll say, an exciting area, to put it lightly, for private equity, is when you purchase a company, and then you come in and you got some moves to make. Maybe you got to hire more people. Maybe you got to let some go, new systems, old systems, whatever that might be. And so, you know, many PE firms say that they partner with management. Now, you guys emphasize being on site early and often. So my question for you is, how do you drive change without disempowering the operators when you guys show up?

Eliot Kerlin  

It's great question. We have to make sure we're not too intimidating, right? And in on site, early on site often is, is both a philosophy, but it's also a tactic. It's a philosophy because we want to be partners with management. We want to journey with them, and at the same time, we don't want to get in their way. You know, on one end, one extreme might be, are we looking to take over their job? No, right, we can't, we can't run their company. We don't know their company or their business as well as they do. We're investors. We think operationally to help improve investment returns, but we're investors. We don't want to run their company, and so we're not a threat to take their job and I think it's important people understand that, because new faces with new ideas, and our ideas are ideas that they're not necessarily, you know, mandates. There's nothing sacrosanct about what we're seeing. We're just seeing that a lot of times, these strategies, these analyzes, can be insightful and can work in a variety of contexts and industries. So let's look at this together, and we really try and involve management. I think that's one of the keys to get buy in of the finished product is to get involvement as you develop it, as you scope it. Here's what we're trying to accomplish as we plan how we're going to do it. How do we access this information, how do we get it and try and involve them the entire way? That way, there's alignment around the output, there's ownership, there's shared ownership about the output. So we evolved management. This isn't a top down, we have to jump through this hoop, it's more of a here's a tool that we've used before. If we use this together, can we all benefit? So we'll work with them side by side to scope it and to deliver it as well. And then talk about, how do we implement this at again, a lot of these discussions, a lot of these discovery processes are best done looking together at the same piece of paper. In person, you can look on a screen at a lot of stuff, but if you're literally co-laboring right like, if you think about the word collaborate, it literally is CO-labor. If we're there collaborating, co-laboring with them, there's a better chance that we get the right answers and side flying, at least, and there's a better chance that it gets implemented, because we have buy. 

Ryan Miller  

I love that that builds a lot of trust, I think, with those people, as we talked about earlier, where trust and capacity and these things are in short supply in the very beginning, so people don't know, right, new company buys us out, what does that mean? You always hear new buyout people are getting laid off. And, you know, anxiety can can be a little bit high, and then, obviously, I'm being dramatic here, but this is really good, and that makes me wonder, though, because in founder run companies, culture can be both a moat and a land and a landmine. So how do you underwrite culture risk in your due diligence, and what are your top early interventions on making sure that that goes smoothly, because I remember side note context. I even remember in grad school learning about how culture, believe it or not, not, financial statements, culture is the leading cause of acquisitions and mergers to not work, to fail. And you never think is your finance school, and you think it's all spreadsheets and three financial statements, and that's all there is to it. And then you actually get to grad school and you're like, well, hold on, there's culture, there's people, there's pulses, there's things that you actually have to pay attention to. So with that, what are, how do you, how do you underwrite that? Do that culture risk and what are some of those early interventions?

Eliot Kerlin  

Yeah, it's a great question. I mean, I remember in business school, we had a class on operations, and our professor had been a CEO of a very large, multi billion dollar electronics distributor, and he would talk about operations through the lens of being a CEO. And he used to say, I know this, you know we're talking about operations and engineering and lean, but it's really this kind of ooey, gooey, mushy kind of leadership stuff that's the most important, right? It's easy to just write it off, it's kind of touchy feely, you know, I want to know how to be a leader. Well, to be a leader, you have to create that culture, and you have to be sensitive to the culture and the people that are there, because people make the culture, and time solidifies the culture. And so based upon what that company is used to doing, and those people and those people and the way they communicate, and enough time going by culture can seem like a very stable, solid artifact, something that just doesn't change. We do it this way, we've never done that, right, these are said like definitive reasons. They're not really they're more observations, we haven't done that before. Well, we'd be open to trying something new. So to understand culture again, you have to be there in person, you have to be listening, you have to be walking in the hallways to the extent we can, we love to meet everybody in management. We'd love to meet as many people as possible before we acquire a company. The reality usually don't get that opportunity right, because that news is a little more confidential, it's held more closely. So it can be difficult to judge culture and under eye culture, as you were saying before an acquisition, I think it's a critical question. 

Eliot Kerlin  

We have several tools we use. We will do a culture survey of the company, and when I say the company, it's as many people as we can. It's not just a C-suite, it's not just a senior leadership team or even middle management. We like to go down to whatever the entry level positions are, if we can, because we're trying to understand, how does communication happen at the company? How well do people understand the company's mission and the value that they're delivering their reason for being? How well do they understand the vision and where they're going and what the strategy is to get there? And so the only way to do that is to have a blind survey of as many folks as you can. And then we can slice it different ways, by location, by job title, by functional, vertical, right, we will invest in doing a team culture beforehand, if we can. And then at the leadership level, we like to start at the top and understand role definition and personality or behavior type. And again, some of you know there's some subjectivity to these things and there can be false precision when you take a test and you're like, oh, but so and so it says. Here is, you know, 4 out of 5, or it's 10 out of like, this is, this is subjective. We're trying to put complex people into a, you know, personality type or abbreviation or something, but we've actually had great success using those tools both to help us understand better who we're dealing with and how people receive good news, bad news, how they communicate, and also to help them strengthen relationships within the team and help all of us learn how do we communicate, deliver feedback, right? How can we function better together, hold each other accountable? And there's a number of different systems that I've actually used before, over time, what we found to be important is to have that shared vernacular, where, when I'm talking now, whether it's the Enneagram, and this is a, you know, eight or two or whatever, we have a common framework, right, whether it's Myers, Briggs and kind of in T, J, I, N, T, J, like, if you know what those mean, that can be very helpful if you use it consistently. So it helps us understand, going in, kind of who we're dealing with, and how to how to deal most effectively with each other. And then we can use that and have coaching sessions for how does that team also grow together by using those same tools.

Ryan Miller  

Yeah, that's brilliant. I know building a team, especially at the executive leadership level, or ELT, as I like to call it, executive leadership team. You can have a lot of big, big personalities that are rightfully earned. Usually when you're at that level, it's you're you're a force to be reckoned with, and you try to fill a room with all kinds of people like that. It could be amazing, or it could be a lot of work. And so having, I think what you're saying is having a lot of those tools in places like Myers Briggs or Enneagram or other tools that you may use might help to figure out, how do we turn a lot of big, successful people into a functioning team where they they move as a single unit, would you say that's an accurate review?

Eliot Kerlin  

That's exactly right? Yep and to really be able to prescribe that as a solution, we have to understand it ourselves, right? So our team has gone through days and days of training on different predictive indices that you can use on the Enneagram. We participate at the company level on different operating systems, lean implementation. We're there with them, going through it, not not to monitor it, and not really even to instruct, but to share examples. And to be a participant, and the more that we're exposed to it, the more we learn, the better we can help explain and implement right? But these are, these are important tools that we all, that we all need to embrace, because it does help us be, be one, that the more that we can eliminate misunderstanding, miscommunication, presumed intentions that weren't accurate. The more that we can understand each other, right, the better that we can the better we can move forward. I've often found that the conflict on an executive team, on our own teams, it's not so much about people not caring. It's really a misunderstanding, it's really I thought I heard this, but that wasn't what he or she thought she was actually saying. And so how do we understand how to communicate better. Use some tools for listening, use some tools for expectation setting, for delivering feedback, and then I can hear you better now, because I know more about what makes you tick.

Ryan Miller  

Brilliant. I've been in a lot of those ELT meetings myself, and I can tell you they can be pretty spicy, sometimes not not in a horrible way or no disrespect to anybody, but they, I would agree with what you said is, if anything, executives care too much, and they defend their turf, not in an ego way, but, I mean, their team, they're all the stuff that they're responsible for doing and and they, you know, they go hard on some of that stuff in a good way. And that's what got them there is to be, you know, then they don't, they don't, they don't punch soft, for sure. 

Ryan Miller  

Hey, thanks for listening to Making Billions. If you liked this episode, could you do me a huge favor and go leave a review? This helps us to get the podcast to more ears, to help people raise capital, learn fund management strategies and serve our mission to help fund managers and deal syndicators to gain greater hope and focus as they build their input. All right, let's get back to the show. 

Ryan Miller  

So moving on, I'd love to know just, how do you guys define Broadwings strike zone today and like, where do you believe that you guys have a durable edge versus other lower middle market sponsors?

Eliot Kerlin  

So our strike zone is in the lower middle market, like we talked about. There's a size consideration, but that's a pretty wide zone that gives us some space to throw we also look at certain sectors, and found that our experience and where we see a lot of opportunity is in manufacturing, domestic manufacturing, services, distribution companies, where the base of operations is in North America. So we acquired, as you mentioned, I've acquired companies in multiple different countries, but those were always add ons. Those are growth investments in Europe or Asia or South America, where we could Central America, where we could grow outside of a base in North America. And the reason we like to be in US, Canada or Mexico, is so then we can be in person right when we're when we're investing, we talk about a partnership period, not an investment period, because we're not passive investors. We're active partners, collaborating with management to create value and that's easiest, that's best done when we can get there in person. But there's a lot of sectors inside of manufacturing, services and distribution, so we spend time becoming sector experts, and looking for opportunities where we think there's the best chance of value, right, so we're looking for where it's value out of favor, sectors, not necessarily contrarian, but just not the flavor of the days. Where we can look at something ideally with somebody in our network who's either been an executive, an operator there, has invested in that sector before, ideally run a company there that gives us insight into what we want to build, it also gives us credibility when we speak to sellers. And we develop these themes a couple of times a year, but we're going deep on a sector, developing the proprietary approach methodology to call on companies to meet companies, meet with sellers and see who wants to be part of the vision that we have to build a platform in a lot of times the types of opportunities, then would be first time institutional capital that's open to an operational approach. We talk a little bit about improvement opportunities, and we've got different ways we think about them, but we that as we build a list of operational improvement opportunities, there's multiple things on the list, other growth avenues. There's multiple operational items that we can pursue together, and where we can have this partnership over 3, 4, 5, 6 years together, where management says, yes, we want this type of scale. There's some companies and teams that are very comfortable where they are, and that's great, because they're doing a really good job doing what they've done all along. But if you want to scale, if you want to go from local to regional, regional to Super Regional, or even national or international, that's where Broadwing can be very helpful to get that foundation in place and then to scale.

Ryan Miller  

So that list that you guys have is that like a pre built list of areas that you can draw on, almost like a Wikipedia that you've internally built, or is this list an output from a review. So is it somewhat of a list that you say actually these five areas that we've already had, like a pilot, you have this checklist, or do you go through and do a custom list on each deal?

Eliot Kerlin  

So when we're sourcing and thinking about themes, is kind of both. We look at areas where we've invested before where, and we revisit those and take, you know. You know, a third portfolio company is an automotive aftermarket supplier. We've invested in automotive tier one suppliers, we've invested in automotive aftermarket services. And so as we thought about automotive for that point in time, about a year and a half ago, we were trying to take, where is the value or the least risks? Where do we see the most opportunity and that's how, that's how we came across the sector that we liked and went with that. But when we think about scanning and screening companies that come into our funnel, we have a checklist, and there's a standard one where we kind of assign a score almost right, red, yellow, green. We've got different criteria that we're scoring against, whether it's things like customer concentration, a supplier mix and supplier power and input volatility, market growth and size and profit market, you know, so we score all these things out. And sometimes, you know, it's an okay score, and you're like, ask to want to learn more, right? There could be an angle here. And other times, it's a great score, and it's very clear, let's try and learn more about the situation.

Ryan Miller  

Brilliant. So with higher rates and even now some frothy, choppy markets, how are you guys thinking about capital structure, hold periods and some exit optionality?

Eliot Kerlin  

You know, I think our first thing is looking at the debt load and, you know, we're, we're in the business of leverage buyouts, right? We put the, got to have that L to have an LBO, have the leverage. But rates are high, and so if, if we can underwrite today's rates and maybe even slight rate increases, then we feel pretty good about the next five years, where we would expect to see rates continue to drop over time, based on the strength of the economy, you know, as it continues to prove that is durationally significant, straight structural strength, we would expect to see rates come down and and if so, then that's just upside to our capital structure. But we want to make sure we're levered appropriately for that industry which might have some ups and downs, for that company, which might have some ebbs and flows in terms of sales or products or profitability and as we do, we talk about over equity. So upfront, we would rather put more equity in from a total capital stack, and then over time, use the balance sheet to finance growth as we can, or return to our shareholders as we can, but that way, we don't have as much pressure from the leverage load.

Ryan Miller  

Got it okay. Do you notice that valuations have come down a little bit because of the higher interest rate or what are you seeing on a price strength standpoint?

Eliot Kerlin  

Yeah, I did see valuations over the last year have been down. The last three or four months, it seems like valuations have been ticking up a little bit. There's been maybe a lot of capital sitting on the sidelines ready to get back in, right so that could put a little pressure up on valuations. We've seen rates come down a little bit, and I think there may be some optimism around rates coming optimism around rates coming down. You know, a complexity factor that arose, though, was really on the tariff side of things and how does that play out in a lot of different supply chains and industries? And that may have caused some folks either to sit out or to pull processes. We've seen processes get pulled where initial impact from tariffs weren't that big. And then now, six months into it, 5, 4, 6, anyway, we're starting to get more and more data points for tariffs actually may have had a latent impact, a delayed impact, and that could affect processes that are in market now, as well as going into the new year. But a lot of times we'll see processes get ready to launch in January and February, and I would expect next year to be pretty robust, from a from a volume standpoint, maybe a little bit of looking around seeing, you know, it is this, are we ready to go? Like, is this a robust M&A market? But over time, in the spring, I think we'll see a lot of processes launch, and a lot of M&A activity in the market, you know, all close.

Ryan Miller  

All right, from, from lowering rates, and you think that's going to spur a lot of lot more activity and.

Eliot Kerlin  

Yeah, lower rates, a continued strong, relatively strong economy from a macroeconomic standpoint and visibility around tariffs, right? I think if anything, the perceived tariff risk, maybe it's just the tariff uncertainty will continue to come down as well, either because things get worked out and tariffs go down, or because people adjust to the new normal, and they can start to price in that risk with a little more certainty than what we've been dealing with the last few months. Or in some cases, you kind of wonder, wait, you're gonna be a new tariff in two more weeks, right? So if they at least know what we're dealing with, and once we know what we're dealing with, then you can start to structure around it, right? So I think that that added certainty coming into 26 where we'll be, you know, by April, May you'll, you'll start to be a year in on some of these tariffs. I think it also kind of helps lower the blood pressure a little bit.

Ryan Miller  

Got it? Yeah, we actually, I just did an episode talked about balance of payments, tariffs, global trade, foreign currency. It was pretty heavy. So for those who actually made it through, good for you, that was a pretty dense breakdown. But the macros, it seems like you're seeing that macros are really starting to take a front seat, and a lot of M&A and business activities, would you agree?

Eliot Kerlin  

Yeah, I think there's definitely a ripple effect where even at our end of the market, if you know, for a while. The IPO market seemed a little stronger this fall. And when there's a good IPO window that provides exit opportunities, which means that investors are getting their cash back, which then allows them to reinvest. And so they're investing in funds, they're co-investing, they're investing in debt securities, which all of that helps push M&A activity forward. So I think there is, I think there's a strong element of that where a strength in the stock market matters. We're private equity, and yet the stock market still trickles down to affect us. And strength on the interest rate, unemployment, tariff stability, economic stability, all matters to us as well. We're kind of, kind of the tail right on the big dog of the economy and the mega funds, but it still matters.

Ryan Miller  

Yeah, brilliant. And you know, speaking about funds, or you wouldn't have a lot, unless you had some deal flow. Now, everybody claims proprietary deal flow. What does your sourcing engine actually look like under the hood and how do you guys defend that? 

Eliot Kerlin  

So our approach is, we talked about being somatic and proactive, and so I'll share a little bit of the secret sauce on the approach here, we talked some about the thematic. I think firm our size, right, we're the lower end mill market. We've been fortunate to raise a lot of capital last three years to be able to start to build out our first funds portfolio, so we're very thankful for that, but we're still a pretty lean team, right, everybody's wearing a lot of hats and carrying a lot of water and so we want to focus our efforts. And that's where the thematic, the thematic focus, helps. It's not necessarily a specialization, right, we don't just invest in franchisees or restaurants or financial institutions. They use SaaS tech, you know, something like that. We're a little bit broader and so this allows us to have, at least for a time, 6-12, months, a real focus on a sector where we can get our name out there and we can develop a pipeline of opportunities. And then the second part of it is being proactive. That means being willing to pick up the phone, that means the outreach that is so easy to do on email, if you can find it, but really trying to get in person to folks. And so how do you do that, it's getting the first meeting through a call or an email. It's going to trade shows and walking the floor, meeting companies and developing a dialog that might last for, for years. We've acquired, I've acquired companies that been talking to for over two years, not even as a courtship, just as a relationship build. And over time, as somebody moves to a place where they're thinking, now is the time for me to exit, now is the time for me to sell my company. Who do they know, right? They know somebody that they've been in conversation with for months or maybe years, and there's a level of trust already, there's also a level of understanding. So it just won't be as painful a process if you're dealing with somebody that knows your industry has gone deep on your sector, maybe visited your production facilities before, understands a little bit about your financials, met a couple of folks on your team. That's a lot easier, more comfortable transaction, and so we like to be in person, proactive, outreaching, to get folks on the phone, get to the right person to get folks on the phone and develop a relationship, maybe before they're not even ready to sell. 

Ryan Miller  

Brilliant you know this, this brings me to something that's interesting. Is a lot of times, especially in the lower middle market that you operate in, and myself included, a lot of times in the lower and middle market you have founder and family transactions that are happening, right? You're dealing with not someone this company is in a pancake that's been flipped five times, or whatever metaphor you want to use. You deal with a lot of the original founders, and they have legacy and their heart and soul, and it's like handing taking one of their daughters and hand in marriage. And it's not an easy thing to do, and I am terrified of that moment. Side note, so how do you balance legacy identity and control while still installing governance at scale for the companies that you buy?

Eliot Kerlin  

That's a great question that is an insight and a very important question, what we do? And you know, a lot of it starts with a conversation up front, during even that courtship period, during that get to know one another. What could a transaction look like? We spend time with sellers trying to understand and sometimes trying to help them articulate. What does success look like for them in a transaction? What is what's their goal? What are their intentions? And there's different things that people care about. You know, just because you've had a company for 30 or 40 years doesn't mean that everybody cares if their name is still on the door, or that everybody's trying to maximize the value that they sell it for. Or that everybody is very wooden about like people have to stay in place. They may have created their own bonus structures and success incentive programs for their employees, where maybe they could transition out and they could retire as well. So we want to understand kind of what is important from a legacy standpoint, from an a company culture and identity standpoint, to that founder and to their team important. And sometimes it depends if it's if it's a first generation, you know, a founder themselves, or if a second or third generation in the family. I think I've seen you, I haven't done a study on this, but I think the further away it is from the founders generation, the more the legacy owners care about the name on the door, the family name or the historical name that their mother or father or grandmother, grandfather, great ya, start, right? Whereas, if you're talking to a founder themselves or an entrepreneur that started the company, they may care less about their name. They're more interested in what they built and taking care of their people or maximizing value and that might not be right now. That might be picking the right partner the right firm, like a Broadwing to help drive growth for the next five years, and they want to roll over a lot of money to do that. We've had folks when we've acquired companies from founders and families. We've bought folks out completely if that's really what they wanted. And we've had folks say, I want to roll over 49 I want to be 49% of the new company going for you guys get 51 Broadwing, I get 49 because that's how excited I am about the future. We really it really is owner specific. But I think aligning those expectations up front is a key marker for success down the road, because nobody wants to look up post close and realize that the private equity firm wants to change the brand, and the founder really valued that. Just assumed it would always be on there, or that the private equity firm is now bringing on new people, and that culture is changing, and the founder really wanted that team to stay in place, and didn't want any changes to it. So we have to align value, align expectations up front. And I think another thing that we use to work with families is to understand, how do we take care of the people and their community legacy, right? All of these companies have a legacy and a reputation in their industries. That means trade associations and industry organizations, co-ops and cohorts within that industry, and also the community, where very often they've been involved in a pillar of different civic activities or nonprofits and we want to honor that to the extent we can as well. We will work with sellers to create legacy funds, to create legacy organizations, or to ensure that the practices that have mattered to them and their employees continue. 

Ryan Miller  

So So with that, a lot of this, what we're talking about is internal operations and personalities, and those do matter, for sure, but what about in the community? So my, I'm curious of, how is it when you guys are acquiring a business, how do you integrate workforce development and, say, community impact into the value creation without diluting any of those returns?

Eliot Kerlin  

Yes, it's actually a key part, I believe, of building a competitive differentiator, particularly in skilled labor skilled trade companies, because it's so hard to find great people today, and it is difficult to find trained great people, whether or not you have to be licensed by the state or by an organization, even just being trained already, is is hard to find. We have fewer vo-tech schools, high schools don't typically have vocational programs now, and so we've found that we need to create it. And if we create that internally, that's a source of competitive differentiation down the road. It ensures that we have the level of technical skill we need internally, and it also can help in this constant flywheel of recruiting, of trying to find talent. So we have partnered at different companies in different states. We've partnered with the state before, and we've partnered with vocational schools or junior colleges to create our own universities, our own academies to, for our mechanical electrical plumbing company, for our specialty emergency vehicle upfitting business. As we look at other companies, we're seeing this opportunity as well in different industries, where we can partner to bring folks in, give them that training program, so that they emerge from the program skilled with a job. There's oftentimes certain recognitions or incentives that go along, and ideally, the angle is to chart a path. So if enter here, not only do you leave with skills like you would at a school, if you enter here, not only do you leave with a job like you would through a job placement firm, but you're going to have skills, a job and a career path A future here with a company where you become part of a team, part of a family, part of part of a company, team identity that's driving towards something bigger, and you're part of that now, and you're helping make that a success and here's the future. And so we talk a lot about the strategy and where we're going but also kind of what the day to day looks like that could include getting some tools along the way, some success bonuses along the way, during the training. The goal and the ideal is that then they have a reason to stick around more and won't just leave at the next opportunity, but have a dialog where they say, I want to grow with you guys, what's my next step? We're investing in our own future that way. We're creating our own competitive barriers by training up folks within our companies to wear our logo on their shirt, but also to be part of something bigger.

Ryan Miller  

Yeah, I love that. Training is one of those very important things. I think, was it Richard Branson something? It was a story about, what if we train all of our people and they lead? Even is responsible. What if we don't train them and they stay? And, you know, that's a very interesting business paradox, for sure, is, is, what if we don't train them and they stay? So we're going to get our butt kicked. So investing in training, I love it. It's absolute value creation, and it's, it's fun when people feel like they're being invested in by the company that they work for it. It feels good. I think that boosts morale and engagement, but that's just a theory, man. So I love it. Thank you., yeah, so you've, you've watched a lot of cycles over your career. You built firms and you even launched your own, what are three strategic mistakes that you see emerging managers making today, and how should they correct course?

Eliot Kerlin  

Well, that's great question. I'd say the first is being willing to take your own medicine. You alluded to it a little bit earlier, but it's easy when you're investing in companies, when you see so many different businesses and models cultures, to identify what works well, what doesn't work, and and coach your companies on that right, bring it up at the board meetings, implement it as strategy and tactics at the companies, but as a firm, we need to be investing in our own growth and thinking strategically about, how can we be successful? How do we invest in our culture? How do we invest in our own people? So when we're doing personality tests or behavioral assessment or for a team culture survey, we do the same thing ourselves, and we measure it, we monitor it. We have a stakeholder impact plan and nonprofits here locally that we're involved with. We invest a lot in team training as well as in the communication and reporting cadence that you would want to see from a portfolio company. And so we're big on our own systems and processes and training. So that'd be number one, take your own medicine, right, if it's good for the goose is good for the gander or something, there's nothing out there. 

Eliot Kerlin  

The second, I would say, is just be patient. It's really hard, right? We're excited to invest. We're excited to find a great opportunity and to build a portfolio of those. But it's it's worth rating for the right opportunity, for the right structure, the right alignment with the sellers and with the management team. You can only, you can kiss a lot of frogs, which is important, but you can only go deep on so many companies, because it gets expensive, right? And so really being disciplined about what you want to spend time on and invest your time resources in can be almost as important as what you want to invest your financial resources in. So I'd say, be patient. Take your own medicine. 

Eliot Kerlin  

And then the third is, people are the deal. That is a mantra that I've become more and more I become more and more convinced of every day. People are what drives the value. People are what make up companies people are worth investing in. I take a reason why we do what we do is to strengthen communities by investing in companies that employ people, not just AI, they employ people, and those people go home and have a family, and they invest in their community, and they give back to their community and we want to provide as many jobs that help people flourish as possible. So people work is better than just financial modeling and paperwork. We want to be working with people and valuing them and not treating people as a transaction. The deals may be the transaction, but people are not a transaction, and so it's important to enjoy the journey, to enjoy the value creation. It's not just about the exit, it's about celebrating the little wins along the way. We do that internally, every week. We start off every Monday morning meeting with discipline of gratitude. What are we thankful for, what are the wins we can celebrate, big or small at work, outside of work, right? Not everything important in our employees lives is all about Broadwing. And so what are the things that we can be grateful for, and let that trickle over to how we think about our companies? So that's our medicine. Be patient. Celebrate the wins and value.

Ryan Miller  

I love that. You know, often in my firms, I believe celebration, it's a whole thing, neuroscience and all that. But what I say quite a bit and implementing culture as well, is when we celebrate we accelerate, or what we celebrate begins to accelerate. Either way, there's so many versions of that. What it does is it too often, especially this, high achievers as we maybe some people might our moms might tell us that we are, but very often we will see this and we'll say, yeah, okay, I raised a million dollars, but it's not 100 million, so I'm not really going to celebrate or I raise 100 million, but it's not a billion, so I'm not really going to sell it. And often high achievers in business, whether it's a fund or an operating company that got bought by a fund, either way, too often we see not enough celebrating. But the thing is, celebration releases a lot of good brain chemicals, and it can make you addicted to winning, and that's the point. And so that's why I said, I don't care if you just finally had someone get your call, and maybe it was an investor that you've been chasing for five years, and they finally took your call. Whatever it is, please celebrate, because when you celebrate, you accelerate. It teaches your brain to be like this feels good, I like celebrating, and it's all because I had a small little win. And little by little, you train your man, your mind to be addicted to winning. So don't be afraid to celebrate. I love that. So as we wrap things up, is there anything, any ways people can reach out to you guys, or anything at all? Final remarks.

Eliot Kerlin  

Yeah, yeah. Look, we have our website is broadwingcap.com broadwingcap.com, you can always reach out to us at info@broadwingcap.com, we love getting feedback. We love hearing investment ideas that might be in our sweet spot. We'd love to partner with you on pursuing them. And I'd say, you know, for the first 50 folks that reach out and mention something interesting about what they learned here, because these are always very educational. If you live in found something and email us, we've got a little Broadwing gift. Will shoot your way to say thanks. But most importantly, Ryan, thank you for having me on. This has been a very thorough dissection of how to approach lower middle market private equity, I appreciate it. 

Ryan Miller  

I appreciate you coming on, man. So just to summarize everything that Eliot and I spoke about, don't overlook culture for companies that you acquire, this is a really key part, and it can make or break a deal. It's that potent. The second one is, watch for the macro landscapes to master private equity in today's market. Third is, be patient. Take your own medicine, and remember people, work is greater than paperwork. And finally, don't be afraid to celebrate. When we celebrate, we accelerate you do these things, and you too will be well on your way in your pursuit of Making Billions.

Ryan Miller  

Wow, what a show, I hope you enjoyed this episode as much as I did. Now, if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better, and make sure to come back for our next episode, where we dive even deeper into the people, the process and the perspectives of both investors and founders. Until then, my friends, stay hungry, focus on your goals and keep grinding towards your dream of Making Billions.