Well Capitalized

Senior Operating Partner's Role at Private Equity Firm

February 13, 2020 Chris
Well Capitalized
Senior Operating Partner's Role at Private Equity Firm
Chapters
Well Capitalized
Senior Operating Partner's Role at Private Equity Firm
Feb 13, 2020
Chris

We recently sat down with Harry Shimp, Senior Operating Partner at MCM Capital, to discuss his role at the firm and its portfolio companies and thought you might find it interesting. Among other things, Harry covers:

  • Types of issues a CEO of a portfolio company should discuss with a senior operating partner
  • Setting the communication and reporting cadence between the portfolio company and senior operating partner
  • What management teams should expect from weekly calls with a senior operating partner
  • Characteristics that make a potential portfolio company attractive to a senior operating partner
  • Maintaining a company's culture after a private equity acquisition
  • Advice for business owners considering selling to a private equity firm
Show Notes Transcript

We recently sat down with Harry Shimp, Senior Operating Partner at MCM Capital, to discuss his role at the firm and its portfolio companies and thought you might find it interesting. Among other things, Harry covers:

  • Types of issues a CEO of a portfolio company should discuss with a senior operating partner
  • Setting the communication and reporting cadence between the portfolio company and senior operating partner
  • What management teams should expect from weekly calls with a senior operating partner
  • Characteristics that make a potential portfolio company attractive to a senior operating partner
  • Maintaining a company's culture after a private equity acquisition
  • Advice for business owners considering selling to a private equity firm

hello and welcome to well-capitalized I'm your host Bobby Kingsbury managing director at MCM Capital Partners today I have with me Harry Shemp senior operating partner at MCM and we're gonna discuss and define his role what it is or what it involves post transaction what are the reporting requirements the appropriate cadence after a transaction and when everything isn't up into the right how do private equity firms typically react would like to start with you providing at least a little bit of of your background and how you got involved in private equity well Bobby is as you know educationally I'm an engineer mechanical engineer and second time through as an electrical engineer and following a stint in the Marine Corps I joined General Electric in high temperature materials division which I ended up being the vice president of that division and left GE in the early 90s and that's when I first got involved in private equity and after a couple of years and the start one of the companies I was running got acquired by BP out of the UK and ended up being a senior vice president at BP for a while so with Andover Corporation our latest acquisition that'll be the 18th time that I have been a president or CEO of an organization and obviously from very large ones and hundreds of millions of dollars for GE and BP to small ones so I find working with smaller companies to be more rewarding than than the larger companies there's less political influence on the decision making it's it's more about economics you find that you can have a direct impact on the performance in the business you can you can see the results your decisions bad decisions as well as good ones but but you get those results right away so I find that particularly rewarding and and frankly I get to know everybody yeah so there's there's a personal sort of relationship with with with the people that you know you don't get when you've got 25,000 people on an organization you can't know everybody then right so many private equity firms have senior operating partners can you explain to the business owners listening exactly what the senior operating partner is their role and what they can expect from interacting with a senior operating partner the role of senior operating partner tends to be a little different if you're in micro-cap versus really large cap so we're in micro cap so so let me stay there so the senior operating partner is is the key contact point for the management of the company and so the financial reporting you know all automatically goes up to the private equity group in this case you know goes to the Cleveland office but in issues that are sort of day-to-day issues with it the presidents of the companies that are grappling with and it can be gee my medical insurance is going up by 15% this year you know do you guys have any experience in trying to hold that down and see what what would be the norm for vacation policies or oh I got to let somebody go and you know what do you think about severance things like that of course those are all people related putting together a long term strategic plan which many small companies don't have so you know how do you view that and in particularly you know what is a private equity firm look for versus a family-owned firm for example you know what about the timeline differences so it's more being a coach and and really a partner with the president aunt and his executive team than it is being sort of a direct superior are there times you know when when the operating partner says no you have to do it this way yes but those those are very rare and in fact it's not good really if it gets to that point right you what you want to make sure is or not make sure but what you want to try to get to is the senior operating partner should sort of have a Vulcan mind-meld with the president of the company and they know how each other is thinking so you can explore different avenues but it shouldn't be a surprise at the end of the day after a conversation you know that you both agree on the right path to go on but that's how I would truly it is a marriage and communication is about communication yeah is always key on on these sorts of things so you know the very first thing is understanding you know what the goals are and and at MCM we try really really hard when we put together the deal to align the goals of the executive team with the goals of MCM capital and I'm sure you've talked about this you know in some other videos but you know we like to make sure that you know economically things are aligned we discuss things like where's the company going to be and you know what what's the policy for family members in the company so we try real hard upfront even before you know the ink is dry to make sure people's goals are aligned then you know one of the very first things I need to do with what the new president is to sit down and say okay you know this is the working environment this is how we're going to work so here are the things that you know you do by yourself you don't need to talk to me about and hear the things that you do and here's a bunch of things that are in the middle and if you want to call me call me I'm always available to you and that communication should be an easy two-way flow you know there there shouldn't be any anxiety at the company you know if I put a call in all right you know I want to come down and visit and you know neither should the president or one of his you know direct reports feel anxious about calling me and then in fact one of the things I tell people is you know good news you can keep for awhile good news never go stale bad news I want to know it right away in a not too beat up on yeah I want to know the bad news so I can help you that's you know cuz we have the same goal it's your point in in the answer to the last question you talked about you know communication and some things that maybe are appropriate to do on your own versus you know check with the senior operating partner can you provide the business owners listening one or two examples of some things that they should just not worry about you don't have to talk to senior operating partner about and then some of the things that would require your your attention well we're probably the best way to start with that is setting the budget so in all private equity environments but it especially at MCM capital setting the budget is really really important and it starts you know if I just talk about it as a calendar year it starts in sort of the October timeframe of the year before and it's what do we think about sales where our sales going to go next year because sale sets the pattern for everything else underneath so we try to come up with a proposal we get that from the board once you get that you can say okay in order to get these sales what do you need to achieve these sales this is what you think you can get you need to hire people do you need to buy equipment you need to expand your plan what what do you need to do when there's an agreement on the budget that pretty much as long as the president is working within that budget that's been agreed by the board could pretty much call his own shots within the budget if he needs to go outside of the budget then you definitely have to come to me and depending on how far outside of the budget you might say boy we you know we had this great opportunity but we need another million-dollar piece of equipment well that that needs to go to the board of directors right so but it comes to me first okay let's put together a you know a plan and let's justify this to the board of directors so generally speaking if you're if you're looking at sort of you know levels of authority matrix and things like that so our early workforce that is purely within the control of the president of the company do you need to hire do you need to fire do you need to run over time that sort of thing purchasing of you know materials to come in and out you know raw materials for the business service items maintenance items that's entirely within the realm of the president if you want to hire or fire or change the salary of executives on your team now you have to come to me and the president can't change its own salary or compensation and that's that's pretty obvious I I think in terms of people a good rule to follow is one over one so you know if you want to if you have a vice president working for you and you want to move a salary up or down or her salary up or down well you need one over one approval so that comes to me the president salary that goes to the board of directors that one over me one yes one over one and I try to do that also in the communication thing so I tell the executive team you should feel free to be able to call me at any time I said now if you do call me you know it is proper business etiquette that you should tell the president you know hey I'm gonna call Harry or I called Harry so you should let him know the president should not be surprised that you talk to him and the president shouldn't feel bent out of shape if I put a call to one of his vice presidents so by the same token you know the president can pick up the phone and he can call somebody on the board of directors about something mm-hmm and it's proper etiquette for him to say to me hey I'm gonna put a call through to maybe Bobby's on the board or maybe Martin answers on the board so the communication ought to be free-flowing and you know the key to good communication the number one key is honesty you know you just tell people to the best of your knowledge what it is so and that tends to pay off if everybody has the same goals right so not somebody's not trying to go over this way and somebody else is going out way right so let's let's stay with communication for a bit so you know business owners think about selling their business and one of the things that they wouldn't say concerned about but are interested in is the level of communication how often do I need to reach out to the private equity firm you know what's what's the cadence of communication do I need to you know with what is necessary for me to provide so that that's a really good question so when is it what's required in others you what do you want to do right so what's required if I'm the senior operating partner in the business there's gonna be a weekly call and the weekly call one involved the president it'll involve his senior financial person and will probably involve his senior technical person his senior plant ops person in a senior sales and marketing person and those calls are generally on the order of an hour in fact I I staged them one after the other so I I don't want them to go over an hour and and they and they don't and those calls aren't homework those are you know really know and I'll come back to that but let me so so that's the first thing and that's pretty much the only thing that the president has to do with me now on a monthly basis their monthly finances that are put together you know according to GAAP principles they go to me they go right up to the Cleveland Home Office and then there's a quarterly board meeting so those are the things that have to be done depending on you know where we are with a cycle of business and and in how well I you know I really get to know that the team I'll I'll personally visit you know either you know once every week and a half you know right when we start out there'll be a lot of visits and then it usually tends to tail off you know so if I know somebody really well been working together for three or four years you know I might only visit one side of every six weeks probably by that time though in addition to the weekly call the president's calling me or I'm calling him a couple of times a week you know for whatever you know it might be that gee I've bumped into somebody from General Electric blah blah blah division you know and they could really use some of your products and here's the contact number or the president might call and say hey guess what you know I think we might have a really good opportunity on sales so whatever it is but that's really a developing thing getting back to the core of it though it it's really about honesty no one should really be surprised at a conversation you know where the other person is coming from and those were you know getting back to though it to the weekly calls you know it as a business owner some I think you know I've never had to report to anybody before now you're asking to do this once a week you know what's this board what's the purpose so the way we start out with this is I ask the business owner and his team to come up with key performance indicators KPIs I don't tell them what those KPIs are I said but you know when you put together the KPIs I want you to think about something in the realm of sales and marketing come up with some really good indicators for your business then come up with something with operations you know what might that be yeah on-time delivery might be one delivery quality is probably going to be one maybe over time is important in that business maybe not you know the financial indicators are well you know is anybody going past ninety days you know past due on your receivables you know where's your cash or things like that but it's up to the president and his team to pick those KPIs and then we use those in the weekly call to help manage the business so I try really hard not to force the business into an MCN mold yeah what I do want the business to do though is I do want them to manage to the cake to kpi's of their choosing but manage to those so my belief is if you if you have the right KPIs in place and you manage and track those KPIs the financial numbers will come you'll get good results it's generally not a good idea to try to manage to somebody else's financial numbers that doesn't necessarily track directly to the business performance right so if we could take a step back for a minute kind of getting back to the senior operating partner role for the business owners that are viewing this you know what generally are we looking for what is the senior operating partner looking for in an attractive acquisition well that's a really good question so usually when I when I talk when I when I talk to people with a cocktail part and you know that's kind of a frequent question now well gee what do you look for when you buy a business C well I really look for long-term assets but I'm not using that phrase in the financial right sort of phrase right so I'm talking about it from an operating point of view so what is a long-term asset well your quality reputation and that's particularly true say in aerospace or medical if you have a quality reputation it's taken you a long time to build it it's going to be with you a long time conversely if you have a poor reputation in one of those industries it's going to take a really long time to correct that so that's a long-term asset a short-term asset might be cash availability we can fix cash availability when we do the deal so that's part of the thing that MCM does you know okay we've got a structure this so cash availability makes sense we plan for that upfront so other other than these long-term assets we look for attractive industries attractive meaning one we think they're gonna grow and two that they're not going to roller-coaster so in a world of private equity it's really tough to manage if you you know go through big dips and big climbs we look for particularly in my field which is which is manufacturing something special you're bringing something special to the party so what what that might that be well it could be the design of the product it could be there's something unique about your process that either delivers better quality faster delivery better performance it might be you have a unique connection to your customer base you're really really tied in with these guys so we're looking for something unique and and that is something we really want to protect so when the deal is done we an act you our founding partner used to say one of the big mantras is you know do no harm and that's that's still true you know don't screw up what got the company where it is today don't mess with that and so you have to be you know very careful if you're gonna make a major change like you know well well you know we used to have engineering and manufacturing altogether led by one guy and want to split it apart or I want to split engineering into plant engineering and design engineering and well be careful with that yeah and if you do want to go down that path make sure that the president this team really are in agreement they you know they really go yes we believe in this this is the right way to go but it's an asset generally that that may or have you know some some dimensions of the company might not be all that good but if we can fix them a short-term asset issue excuse me it could be their financial position or it might be gee you know we don't we don't have very good financial software in place and we don't really know what our stuff costs we know at the end of the month whether we make money or lose money but we don't know which come you know which products do which products don't that we can fix that that we can bring in you plan for it you know you pick the right thing you put it in so it's it's interesting you bring up you know the the do no harm aspect where as many people view private equity their view of private equity has come in hostile takeovers we're gonna change x y&z we're gonna cut costs we're gonna fire people we're gonna do a B and C it's from from your perspective and being involved in a business how do you work yourself into the company ingratiate yourself into the management team where you have all these outside expectations from employees from a management team about what private equity is well first of all that you know as we started this conversation I there's a there's a difference between big company private equity and small company private equity big private big company private equity and you can think back to you know Richard Gere on pretty woman yeah they they do they split things up and they sell this off and bump up up up up up but that's not our world so we're buying something of value we're buying a diamond in the rough and we're trying to board or maybe it's not totally in the rough but it's not completely polished either but we have the diamond and now we want to make it worth more that that's where we're going I can tell you out of the 18 cut well 18 that I've run for all of the private equity ones that were in that which were 15 I have never sold one I've never been involved in a sale but we had fewer employees I'm going to bought it so so from a managerial standpoint and you know we've talked in a number of different videos to about culture and you know culture is both a retention tool and a recruitment tool and some businesses have a unique culture a concern generally from business owners is how do I maintain that culture moving forward when I saw after I sell my business well you know culture is a broad term in and it has many aspects so as I said we we trend by business that has something unique it has something of value to the extent that culture is part of that value we protect it there are other aspects to culture that maybe aren't really appropriate so very frequently in a small business there isn't any formal process for capex for capital expenditures it's just you know if the if the president owner is convinced that it's a good thing to spend money on you know he writes a check oh it's his checkbook he writes the check that doesn't work well in in the private equity world so there tends to be more of a need for planning for large capex expense the same thing with the budget a lot of people don't you know when they're when they're running their own show it's well it'll be what it'll be you know if there's more money in the till you know at the end month in the beginning then we've had a successful month so we tend to push a little bit more into the strategic I would say as opposed to purely tactical so so that's you could say that's a cultural change that real acquire but the aspects of culture that have to deal with connection to the customer identity with a product or the process sort of the feeling you know and in the whole company that you know my heart is in my work yeah quote Andrew Carnegie write that we protect so drawing on your unique experience and from a private equity standpoint of an investor a board member running businesses for private equity and now being a senior operating partner what advice could you give to a business owner who is thinking about exiting their business and possibly selling to a private equity firm I think there are two things you need I think the two things that you need to put in front of just price and and the very first thing is you know what's your goal what do you as a seller whatwhat do you want out of this if all you want to do is you know liquidate your position and you know move to Bimini well then it probably defaults to just price if there's something else that you want out of this you want to continue in the business you want the business to grow and flourish and provide employment then you know you might you might have some you know soft side goals that you want but whatever those are you need to get them prioritized in your own head and have that discussion with with the people that you're selling to so whatever those goals are I think the next thing is you need to be comfortable with a personnel if you're going to stay with the business you really need to be comfortable with the personalities you're gonna be working with you know do you feel like the people at the private equity firm do you feel like they're honest do you feel like they have you know your interests at heart you know so when they say oh yeah we have shared goals is that what they mean or are they just saying that you know to get the deal done so you know that that's a critical part because you're gonna be family for six to eight years so you don't want to be family you don't want to walk in and have in-laws that are you know all the time that's not a pleasant situation yeah for most business owners this is going to happen once in their career once in their lifetime for a very select few it may happen multiple times if they partner with private equity but if it's going to happen once you want to ensure that not only your your hard goals but your soft goals are one Met achieved and aligned with your potential partner and I actually always say aligned is probably more important than anything else right if you sometimes you can't guarantee that they'll be met you can plan on it can't guarantee it but you can certainly guarantee alignment from the get-go thank you here thank you so much for your time it's a pleasure we appreciate it and look forward to the next episode thank you thank you you